Govt rejects RIL demand for gas price revision

The government has rejected Reliance Industries' demand for a revision in the KG-D6 gas price, saying the USD 4.2 per mmBtu rate for five years was not only agreed to by the Mukesh Ambani-run firm but also upheld by the Supreme Court.

The Ministry on January 30 wrote to RIL quoting from the May 7, 2010, Supreme Court judgement in the gas row between the company and Anil Ambani's RNRL to assert that "any price revision proposal will be examined by the government after expiry of five years from commencement of supply."

While RIL had in its submission to the Supreme Court in the gas supply row with RNRL stated that it was merely a contractor who is bound by government decision on price and sale of gas, the company on January 6 wrote to the Ministry seeking revision of "discriminatory" and "sub-market" price.

The Ministry, however, rebutted RIL charge saying the company had vide letter dated October 24, 2007 confirmed acceptance to gas pricing formula and its tenure as had been approved by the Empowered Group of Ministers (EGoM).

The EGoM, headed by the then External Affairs Minister Pranab Mukherjee, had on September 12, 2007 approved a price of USD 4.205 per million British thermal unit for gas produced from KG-DWN-98/3 or KG-D6 block for a period of five years.

RIL started gas production from the block in April 2009 and thus price revision was due only in 2014.

Justice K G Balakrishnan (then Chief Justice) and Justice P Sathasivam had in the 2010 judgement held that "through the contractor (RIL) has the marketing freedom to sell the product from the contract area to other consumers, this freedom is not absolute. The price at which the produce will be sold to consumers would be subject to the Government's approval."

The Supreme Court, the ministry, said noted that the EGoM had already set the price of gas and parties must abide by this and other conditions placed by the government policy.

Justice B Sudhershan Reddy, the third judge of the three-member bench of the Supreme Court that decided on the RIL-RNRL case, stated that "the EGoM decisions regarding the utilisation of the natural gas and the price formula/basis etc do not suffer from any legal or constitutional infirmities... The parties are bound by the governmental policy and approvals regarding price, quantity and tenure for supply of gas."
Stating that the current price of gas was no longer viable, RIL had in the January 6 given the government 90 days to reach an "amicable settlement" over the pricing of gas.
Under the dispute resolution process detailed in the Production Sharing Contract, parties are required to try for reconciliation of differences for three months before heading for arbitration. RIL may be thinking of arbitration on the issue.

"This sub-market or below market price for natural gas unfairly discriminates against RIL, particularly as the government is contracting with foreign gas suppliers, either directly or through government agencies (such as GAIL, Petronet LNG, etc), for the supply of natural gas within India at prices which are significantly higher than USD 4.20 per mmBtu," RIL said in a letter to the oil ministry on January 6.

GAIL and Petronet are importing gas liquefied natural gas (LNG) for up to USD 14 per mmBtu, it said adding the consequences of sub-market price of USD 4.2 per mmBtu for KG-D6 gas are damaging to both contractors and the government.

"We wish to exercise our contractual right to market natural gas on the basis of arms length competitive sales to the benefit of all parties including the government. We propose discussing with you a revised price formula consistent with Article 21.6 of the PSC and with a view to reaching an amicable settlement within ninety (90) days of the date of this letter (dated January 6)," the company said.

The letter also stated that the current pricing formula for gas is no longer viable given the changed circumstances and is also contrary to the principles of the New Exploration and Licensing Policy and "is harmful to the development of the nation’s energy supply."