Reliance Industries Ltd (RIL), the operator of the KG-D6 gas block, has told the government it cannot comply with its latest directive on prioritising gas supply.
The company said it was against cutting supply to non-priority sectors such as steel, petrochemicals and refineries to expand supplies to priority sectors such as fertiliser and power.
In a letter to the petroleum ministry earlier this week, RIL said the contractual obligation does not allow it to divert supplies from one sector to another and a cut in allocation can only be done on a pro-rata basis.
It has asked the ministry to suggest how it can do so without attracting penalty under the contract. "We are examining the matter and studying the options," said a senior ministry official.
After output from the country's biggest gas producing block dropped 20 per cent, the ministry directed RIL to first meet the demand of priority sectors, and in case any gas is left it should be supplied to the non-priority sectors on a pro-rata basis.
Reliance produced 47.5 million standard cubic metre of gas per day (mscmd) from KG-D6 fields in the week ended March 26, down from 61.5 mscmd output achieved a year ago.
Reduced supply to the fertiliser sector has direct subsidy implications for the government since fertiliser producers get a fixed price while the gap in production cost is compensated by the government.
The government's subsidy burden on fertiliser has declined by over a couple of thousand crore after companies shifted from naphtha to gas.
Reliance has so far signed up customers for 60.76 mscmd of gas while production is less than 48 mscmd.
The government had accorded highest priority to fertiliser plants followed by LPG extraction units, power plants and city gas distribution projects in allocating KG-D6 gas.
Sixteen fertiliser plants have been allocated 15.35 mscmd of KG-D6 gas on firm or permanent basis while 27 power plants in public and private sector have been allocated 29 mscmd of gas.
A sizeable 7.79 mscmd of gas has been signed up with steel producers while LPG plants have got 2.59 mscmd.
Refineries, including that of RIL, have been allocated 3.46 mscmd, city gas projects 0.65 mscmd and petrochemical plants the balance 1.92 mscmd.
With the fall in production, supply has been cut on a pro-rata basis. But the new directive required RIL to first meet the demand from the priority sectors.
The priority sector allocation totals 47.59 mscmd, leaving almost nothing for the steel plants, refineries and petrochemical units.
