The Oil Ministry had on July 12 written to RIL asking it to make a "pro-rata" cut in gas supplies to all existing customers if the production from its eastern offshore KG-D6 fields cannot support new customers like Essar Oil's Vadinar refinery. RIL on July 15 wrote to Petroleum Minister Murli Deora saying it had not signed contracts to supply KG-D6 gas with customers like Essar, as they were not ready to receive gas when available and so allocation made to them has lapsed.

The Gas Utilisation Policy, as framed by an Empowered Group of Ministers, provides for no reservation of gas and users, who said will be able to take gas before end of 2009-10 fiscal, were allocated gas. However, not all those who were allocated gas were in a position to take gas by the appointed date. "...all allocations that have not been signed on account of the customers not being ready to receive gas when available or lacking in the necessary pipeline connectivity cannot claim to have any quantity reserved for them," it wrote in the letter, a copy of which was also marked to Finance Minister Pranab Mukherjee.

RIL's KG-D6 fields can sustain a production of only 60 million standard cubic meters per day and the company has already signed or committed to sign Gas Sales and Purchase Agreements (GSPAs) for 57.8 mmscmd. Against the availability of 60 mmscmd gas, the Oil Ministry has allocated about 64 mmscmd and wants RIL to sign GSPAs with all those who have been allocated gas.

"On the day that KG-D6 production is not sufficient to cater to all the consumers with firm allocation, pro-rata cuts should be imposed on all firm consumers," the ministry wrote to RIL on July 12.

Users awaiting signing of GSPAs include state-run NTPC (1.14 mmcmd), Essar Oil's Vadinary refinery in Gujarat (0.6 mmcmd), Oil and Natural Gas Corp's LPG units (0.406 mmcmd), Rithala power plant in Delhi (0.4 mmcmd) and Bawana power plant (0.93 mmscmd).

RIL says it can sign contracts to supply another 2.2 mmscmd on firm basis as it does not want to sign pacts for commodity it does not have.

"If RIL were to sign firm GSPAs for volumes beyond 60 mmscmd it would be committing to supply gas volumes far beyond what it can currently produce from the field. RIL cannot impose pro-rata cuts on customers already allocated gas on firm basis by EGoM in order to sign additional GSPAs," the company wrote.

"Our position remains that as a responsible producer we cannot sign firm GSPAs beyond available quantities of gas." The Mukesh Ambani firm wanted the issue to be taken up at the next meeting of Mukherjee-headed EGoM on July 27. "Allocations which do not survive in terms of EGoM directions be recognised as having lapsed and the balance quantity of 2.2 mmscmd be re-allocated," the company wrote.

RIL demanded that while considering re-allocation of 2.2 mmscmd, its request for gas for its downstream units should be given "due priority as it is the producer of the gas." "However, instead of re-allocation of 2.2 mmscmd to eligible parties including RIL, lapsed allocations are not only been revived and accommodated by asking RIL to impose pro-rata cuts on customers with whom RIL has signed binding GSPAs," the company wrote.

"Under existing GSPAs as well as directions given by Ministry of Petroleum and Natural Gas, RIL can impose pro-rata cuts on firm quantities only in the event of production from KG-D6 on any particular day not being sufficient to meet all such firm requirements." RIL wanted the EGoM to consider its request for allocation of gas to its refineries and petrochemical plants while making further allocations.

"The gas utilisation policy applies to all domestic gas and therefore while making above allocations, gas being produced from all other sources besides KG-D6 be also considered." The EGoM, in October last year, allocated close to 61 mmscmd of KG-D6 output on firm or permanent basis. Allocations were made only to firms that said they could consume the fuel immediately as the Gas Utilisation Policy does not provide for reservation or holding up of production for anyone.

However, the Oil Ministry allocated close to 64 mmcmd of KG-D6 gas and did not cancel allotments done to companies that failed to take deliveries according to their self-declared timelines. Sources said customers with pending allocations are those who have not been in a position to take gas for a considerable period of time.

It has been suggested that since there can be no reservation of gas, as stipulated by the EGoM, such allocations should automatically be deemed to have lapsed after a reasonable period. The Oil Ministry has so far not taken any view on this, they said.

Of the current production, about 14 mmscmd is sold to fertiliser plants, 28 mmscmd to power plants and 10 mmscmd to petrochemical plants and refineries. The remaining seven mmscmd of gas was consumed by other sectors such as sponge iron plants, LPG, city gas distribution and the East-West pipeline. Essar Oil was allocated 0.6 mmscmd of gas on a firm basis, but the company has not yet signed a gas sales and purchase agreement (GSPA) with RIL, as its Vadinar refinery in Gujarat was not ready to receive gas from the field till recently.

Sources said RIL has told the Oil Ministry that it can presently sustain output of only 53-54 mmcmd from Dhirubhai-1 and 3 fields in the KG-D6 block and 7-8 mmcmd from the MA field in the same area. The company had in December last year tested facilities at KG-D6 for a peak production rate of 80 mmscmd, but it estimates this level of production can only be achieved by next year after more wells are drilled. RIL has 18 producing wells and has sanction of 12 more to produce peak output.

Oil regulator DGH has endorsed RIL's view on limitation of production, saying the output was in line with the approved Field Development Plan. According to the FDP, peak output of 80 mmscmd was envisaged in 2011 and is to last till 2016. Most recently, RIL signed GSPAs for supply of 0.86 mmscmd to the Koyali refinery of Indian Oil Corp (IOC) and 0.2 mmscmd to the Mumbai unit of Hindustan Petroleum Corp Ltd (HPCL).

RIL is in the process of signing GSPAs with IOC for supply of 0.74 mmscmd to the Mathura refinery and with NTPC for 1.51 mmscmd. In addition, 1 mmscmd gas is required for operation of the East-West pipeline, which transports KG-D6 gas from Kakinada in Andhra Pradesh to Baruch in Gujarat.