PMO asks oil ministry to clarify gas pricing issues

The Prime Minister's Office (PMO) has sought a status report from the oil ministry on issues around the implementation of the cabinet decision to almost double natural gas rates.

Director in the PMO V Sheshadari has written to petroleum secretary Saurabh Chandra in this regard following instructions from Pulok Chatterjee, principal secretary in the PMO.

The Cabinet Committee on Economic Affairs (CCEA) had first on 27 June and then on 19 December 2013, decided to price all domestically produced natural gas, including unconventional fuels such as coal-bed methane and shale gas, at an average of international hub rates and the cost of importing LNG.

The new price of $8.3 per million British thermal units was to take effect from 1 April, but the Election Commission asked the government to defer the implementation until voting in the general elections ends on 12 May (See: RIL, ONGC stocks skid after EC stalls gas price hike).

The new rate was applicable for domestic producers in both the public and private sectors.

However, the CCEA on 19 December decided that in the case of the Dhirubhai-1 and 3 gas fields in block KG-DWN-98/3 or Krishna-Godavari D6, operated by Reliance Industries ltd, where output has missed targets, the operator will have to provide a bank guarantee equivalent to the incremental revenue it will get from the new price.

This surety would be cashed, depriving RIL of any incremental revenue, if it was proved that D1 and D3 output dropped to one-tenth of the projected 80 million standard cubic metres per day because of RIL's wilful actions and not due to geological complexities.

Sources say the PMO wants to understand the various reports coming in regarding the implications of the hike in gas prices on the fertiliser sector. The fertiliser sector argues that, under the new pricing regime, gas producers are asking for contracting the fuel under net calorific value rather than the existing gross calorific value, which makes the gas 10 per cent more expensive.

The PMO is also reportedly worried about the impact of the decision to defer the price hike on foreign investors. BP Plc and Niko Resources, partners of Reliance Industries in the controversial K-G basin, have moved for arbitration.

The PMO also wanted to take stock of the CCEA decision to ask RIL to provide a bank guarantee. Both BP and Niko filed their notices of arbitration on March 24. The government is disputing RIL's claim that the drop in production from D1 and D3 fields is because of geological challenges.