FinMin in-principle backs OilMin plan on RIL gas price

Finance Ministry has in-principle agreed to a proposal to allow Reliance Industries to raise gas prices from April provided it gives a bank guarantee to cover for liability in case gas hoarding charges are proved.

The bank guarantee, which will be equivalent to the incremental revenue that RIL will get from the new gas price, will be encashed if it is proved that the company hoarded gas or deliberately suppressed production at the main Dhirubhai-1 and 3 (D1&D3) fields in the eastern offshore KG-D6 block.

"We have received comments from the Finance Ministry (on the draft Cabinet note floated on the KG-D6 gas pricing issue)," Oil Secretary Vivek Rae told reporters on sidelines of the 12th Petro India conference here.

"The comments were received 2-3 days back. I don't know what they have said as I have not seen them yet," he said.

Another official said the Finance Ministry "in-principle" agreed to the proposal but has sought to know if government position on reasons for fall in gas output at KG-D6 will be diluted.

The arbitration, where RIL is countering government stand that non-drilling of committed wells led to 80 per cent fall in output by saying citing geological complexities and lower than anticipated reserves, may linger for an indefinite period, the finance ministry feels.

It is of the view that the bank guarantee in that case may run into about USD 9 billion which needs to be monitored. It also wanted to know the proposed course of action in case RIL does not comply with bank guarantees, he said.

The government in June approved pricing of all domestically produced natural gas, both for private and public sector firms, at an average of global gas hub rates and imported LNG price. The rate in April when the new pricing will be implemented will be USD 8.2-8.4 per million British thermal unit as against current USD 4.2.

However, the Finance Ministry had felt that since gas output at KG-D6 fields fell because of RIL deliberately not drilling the committed number of wells, the new price shall not apply for gas from D1&D3 fields till the shortfall of quantity of past three years is made good or till pending arbitration on the issue is decided.

Earlier, Planning Commission and the Law Ministry have both backed the bank guarantee as the possible resolution to the issue that had threatened to cast a shadow on the forthcoming round of auction of oil and gas blocks under New Exploration Licensing Policy (NELP).

The bank guarantee will cover the difference between the current gas price of USD 4.2 and the new rate of USD 8.2-8.4, which will come into effect from April 1.