Customers willing to pay more for D6 gas: RIL

Reliance Industries is ostensibly seeking a 25 per cent increase in the price of natural gas it produces from the eastern offshore Krishna-Godavari Basin after it wrote to the Oil Ministry saying it has customers willing to pay more than the government-approved price.

RIL senior vice-president (commercial) B Ganguly on September 6 wrote to Oil Secretary S Sundareshan saying that it has received proposals from GMR Energy and Welspun Maxsteel for purchase of additional KG-D6 gas at prices between $4.75 and $5.25 per million British thermal units, a senior government official said.

The price the two customers based in Andhra Pradesh are willing to pay is more than the $4.205 per mmBtu price approved by the government for a five-year period ending March 31, 2014.

Though the letter did not explicitly seek a revision in prices, Ganguly cited provisions in the Production Sharing Contract (PSC) that RIL has signed with the government to say that a higher price would be beneficial to the government and the company.

The company did not make any suggestion for a revision in rates, but referred the proposals received to the ministry for advice and action. RIL's spokesperson could not reached for comments.

Industry analysts said the RIL proposal may not go down well with the government, as the company can, hypothetically speaking, get a letter from some other customer in dire need of fuel tomorrow to seek an even higher price.

Furthermore, the company has all along in the legal battle with the Anil Ambani Group -- which was seeking gas as per a family agreement at rates lower than the government- approved price -- stated that RIL was a mere contractor and the government alone had the powers to approve a price and fix users of the gas.

The position taken by RIL and also by the government was upheld by the Supreme Court recently and so for the company to now say it wants to sell gas to customers willing to pay a higher price was in violation of the Gas Utilisation Policy, which gives the government sole authority to identify customers and allocate volumes to them.

The analysts said RIL has been saying that it cannot sustain output beyond the current level of 60 million standard cubic metres a day and has been resisting signing new contracts at the government-approved price. But it is now seeking to sell gas to GMR/Welspun that are offering to pay a higher rate.

Ganguly, in the letter, stated that RIL had "received an offer dated August 21 from GMR Energy Ltd requesting additional gas supply of 11,000 mmBtu per day for their barge- mounted power plant at Kakinada. The company has requested for this additional supply for a period of one year commencing September, 2010." GMR offered a $5.25 per mmBtu price for KG-D6 gas.

"We have also received a letter from Welspun Maxsteel for purchase of additional KG-D6 gas for their sponge iron plant at Salav at price of $4.75 per mmBtu," he wrote.

Ganguly then went on to cite Article 21.6.1 of the PSC that states, "The contractor shall endeavour to sell all natural gas produced and saved from the contract area at arms-length price to the benefits to parties to the contract (i.e. the company and the government)."

"The contractor (RIL) is currently selling all gas produced from KG-D6 at the government-approved price formula. The offer of GMR Energy Ltd/Welspun is to purchase the additional gas for their plants at higher than the government -approved price."

"Under the terms of the price approval letter dated October 10, 2008, issued to us by Minister of Petroleum and Natural Gas, if the contractor sells gas at a price higher than the approved price, such higher price shall be used for valuation" for the purpose of paying royalty and profit petroleum to the government.

"Under the PSC between us and government, any higher realisable gas price leads to quicker cost recovery, increasing profit gas for all the parties, including the government, and a higher royalty accrual to the government," he wrote.

"Having received this offer, in view of the provisions of Article 21.6.1 of the PSC, we bring to your notice these offers of purchase for your views as a party to the PSC on how to proceed in terms of the provisions of the PSC," he added.