RIL, BP to double gas price on a $1.2 bn bank guarantee

Reliance Industries Ltd (RIL) and its partners BP Plc of UK and Canada's Niko Resources would be allowed to sell gas produced from the main KG-D6 oil fields in the east coast of India at the revised rate of $8.6 per million British thermal units, which is double the existing $4.2 per mmBtu, provided the partners furnish a bank guarantee equivalent to $1.2 billion over three years.

The operators of the KG-D6 gas block may also be allowed to make additional investments in new exploration in new oil fields in the KG-D6 block.

The Cabinet Committee on Economic Affairs (CCEA) had, on 20 December, decided to allow Reliance Industries to almost double the price of natural gas from April 2014 provided the firm gave a bank guarantee to cover its liability if charges of hoarding natural gas are proved.

However, the bank guarantee, which is the difference between the current and post-1 April prices of natural gas, fixed on the basis of the Rangarajan formula, for every trillion cubic feet of gas should be $4 billion.

The bank guarantee is said to be the equivalent of the incremental revenue that RIL will get from the main Dhirubhai-1 and 3 (D1&D3) fields in the eastern offshore KG-D6 block since 2010-11, over and above the current levels of production.

Sources said the bank guarantee for the entire remaining recoverable gas reserves of about 0.75 trillion cubic feet in D1&D3 fields comes to $3 billion.

At current rate of production of about 8 million standard cubic meters per day, D1&D3 will produce about 0.3 TCF over the next three years - the time that may be needed to settle the issue of gas hoarding charges.

The bank guarantee for 0.3 TCF comes to $1.2 billion, they add.

Gas reserves at the D1&D3 fields, the first of the 19 discoveries in eastern offshore KG-D6 block that was put on production in April 2009, was originally estimated at 10.03 trillion cubic feet.

But these were slashed to 2.9 TCF last year, based on production data for the first three years when wells had to be closed following water and sand sweeping inside and a subsequent drop in reservoir pressure.

Of the re-stated reserves of 2.9 TCF, about 2.2 TCF have already been produced in first four-and-half-years and balance of about 0.75 TCF remains to be produced.

Sources said the new rate will apply to all other fields in KG-D6 without any preconditions. The currently producing MA oil and gas as well as fields like R-Series and satellite discoveries that will come into production in 2016-17 will also get the new rates without any preconditions.