Reliance Industries (RIL) has sent a letter to the Petroleum Ministry seeking price revision of gas that will be produced from new discoveries in KG-D6 gas block, off the east coast. RIL has asked for clarity on gas price regulation so that they can arrange funds from financial institutions for developing new discovery and achieving financial closure of four discoveries - D2, D6, D19 and D22 in KG-D6.
RIL said the price of gas to be produced post 2014 should be linked to imported liquefied natural gas (LNG). Mukesh Ambani’s firm in the letter dated September 6, 2012, asks for linking the domestic gas price to Japan Custom-cleared Crude (JCC). JCC is a pricing benchmark for LNG market as Japan is one of the biggest markets of LNG.
If RIL’s proposal gets a go-ahead then the domestic price of gas will go up threefold to over $12.9/mmbtu. The new formula proposes a variable component to price the gas at 12.67 per cent of JCC. It also proposes to add a constant of $0.26/unit in the final gas price.
Taking the prevailing price of crude, which is about $100 per barrel, domestic price of gas will go up to $12.67/mmbtu plus 0.26, effectively taking the gas price to $12.93/mmbtu from the present approved price of $4.2/mmbtu.
The current gas price ($4.2/mmbtu) for KG-D6 is valid till March 31, 2014. The formula proposed by RIL is the same at which Petronet LNG Ltd, imports gas from RasGas of Qatar. RasGas charges 12.67% of JCC.
The rationale behind LNG-linked pricing given by RIL in its letter is that India’s dependence on imported gas is growing rapidly. In the letter it says, "imported LNG in the country constitutes about 35% of gas consumption in the country and this share is expected to progressively increase. Hence, long-term LNG prices represent the best benchmark for arms-length prices."
RIL wants no intervention in gas pricing. It says that regulating the domestic gas price is against the provisions of the contract signed by the government (popularly known as production sharing contract or PSC). The formula RIL has proposed would apply for all gas produced from KG-D6 block post March 2014.
In 2007, an Empowered Group of Ministers (EGoM) fixed KG-D6 gas price at $4.2/mmbtu for the first five years of production. KG-D6 started production on April 1, 2009, and the government till date has not budged to various proposals of RIL to hike gas prices.
Proposing a new formula, in its letter, RIL says, "The proposed formula is in full compliance of the provisions of the PSC that mandate that gas must be sold at arms-length prices to the benefit of the parties under the PSC."