Mukesh Ambani’s Reliance Industries Limited (RIL) has given a resounding approval and is pleased at the notification from the government that will see it almost double fuel prices from April 1st. This comes on the back of the ‘Domestic Natural Gas Pricing Guidelines, 2014’ that will apply for a five-year period. The company also hopes that the five-year transition will eventually lead to market prices and result in higher revenues for the company. A spokesperson for the company was quoted as saying, “We welcome the adoption of Rangarajan Committee formula as a step in the right direction. However, gas sales under NELP have to be at competitive arms-length market prices. Accordingly, we hope the same momentum is maintained and, as per the PSC, gas markets are allowed to develop and transition to market price soon.”
The ‘Domestic Natural Gas Pricing Guidelines, 2014’ were adopted by the Ministry of Petroleum and Natural Gas. These guidelines laid the framework of pricing natural gas produced domestically, irrespective of the source, whether conventional, shale or coal-bed methane (CBM) from April 1, 2014. As a result of this, gas from April onwards will be priced an average price of liquefied natural gas (LNG) imports into India and benchmark global gas rates. This formula will be applicable for five years, from April 1st 2014 till March 31st 2019.
British Banking Major Barclays estimates that the price of the gas will be US$ 8.3 per million British thermal unit in 2014-15 as against the current rate of US$ 4.2. This is expected to rise to US$ 9.1 million in 2015-16 and to US$ 9.4 million on 2016-17. Reliance Industries’ is expected to gain heavily from the new pricing formula. The existing fields like MA in the KG-DWN-98/3 or KG-D6 block and new/upcoming ones like R-Series and satellite in the KG Basin block and the ones in North East Coast block NEC-25 are the ones that are expected to gain heavily.
For RIL though, there is a catch. The company has had to submit a bank guarantee to cover its liability for loss from the Dhirubhai-1 (D1) and Dhirubhai-3 (D3) gas fields in the KG-D6 block. The notification from the Government that pertains to particular issue says, ‘In respect of D1 and D3 gas discoveries of Block KG-DWN-98/3, these guidelines shall be applicable subject to submission of bank guarantees in the manner to be notified separately.’ What this means is that the guarantee will be encashed by the government if RIL is found to have deliberately suppressed production or hoarded the gas prices. This guarantee is also equivalent to the incremental revenue that RIL stands to gain from the production at the main D1&D3 fields in the eastern offshore KG-D6 block.