RIL, BP to give $1.2 bn bank guarantee for higher gas price

Reliance Industries and its partners BP Plc of UK and Canada's Niko Resources may have to provide a maximum of USD 1.2 billion in bank guarantees over three years to get nearly double the rate for natural gas being produced from the main fields in KG-D6 block.

The Cabinet Committee on Economic Affairs (CCEA) had on December 20 decided to allow RIL to almost double the price of natural gas from April, 2014  provided the firm gave a bank guarantee to cover its liability if 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 since 2010-11, sources said.

Considering gas prices will rise from USD 4.2 per million British thermal unit to USD 8.2-8.4 after the Rangarajan pricing formula comes into effect from next fiscal, the bank guarantee - being the difference of current and new price - for every trillion cubic feet of gas production will come to USD 4 billion.

Sources said the bank guarantee for the entire remaining recoverable gas reserves of about 0.75 Tcf in D1&D3 fields comes to USD 3 billion. At current rate of production of about 8 million standard cubic meters per day, D1&D3 will produce about 0.3 Tcf in 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 USD 1.2 billion, they said. Of this, the share of RIL, which holds 60 per cent stake in KG-D6, will come to USD 60 million per quarter. BP has 30 per cent interest and the remaining 10 per cent is with Niko.

D1&D3, the first of the 19 discoveries in eastern offshore KG-D6 block that was put on production in April 2009, originally was estimated to hold 10.03 Tcf of reserves. But these were last year slashed to 2.9 Tcf based on production data for first three years when wells were shut one after another following water and sand sweeping inside along with sharp 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. 

The government, sources said, has already imposed a penalty of USD 1.78 billion on RIL and its partners for producing less-than-stated production targets during last three years. The bank guarantee is an addition to this.

While RIL blames unseen geological complexities for production not matching the pre-stated targets for D1&D3, the Petroleum Ministry and its technical arm DGH hold the company for not drilling the committed number of wells, resulting in output fall.

With both sides not budging from their positions, the issue has been referred to arbitration which may take anywhere between 2 to 3 years to arrive at final verdict.

Prodded by the Finance ministry, the Oil ministry had initially proposed to deny the new gas prices that will kick in from next fiscal till such time that RIL either made up for the shortfall in output during past three fiscals, or it is proved that the company was not responsible for production falling below targets.

The issue had held up notification of the new gas pricing formula that will be applicable to all producers - public and private - and all forms of gas - conventional and unconventional forms like coal-bed methane and shale gas.

As a way out, it was proposed that RIL and its partners BP and Niko be asked to give bank guarantees for the incremental revenue they will get till the hoarding issue is resolved through arbitration and validation by independent international experts.

The government in June approved the Rangarajan formula for pricing of all domestically produced natural gas at an average of global gas hub rates and price at which India imports LNG (gas in liquid form).

The rate in April 2014, when the new pricing is to be implemented, will be about USD 8.2 to 8.4 as against the current USD 4.2.

Prices of natural gas, which is an input for manufacturing fertiliser and electricity generation, will be revised every quarter based on the average of the past four quarters, with a gap of one quarter.