BackReliance’s draft gas sales pact raises concerns
Fertilizer secretary writes to petroleum ministry over issues including fixing gas prices, contract tenure
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New Delhi: Reliance Industries Ltd (RIL) has introduced several new clauses for renewing gas-supply contracts with fertilizer makers, which the fertilizer ministry says will increase the burden on the already financially strained companies while diluting RIL’s own obligations.
Fertilizer secretary Satish Chandra wrote to the petroleum ministry on 20 March that the fertilizer industry had taken exception to a host of items in RIL’s draft gas sales and purchase agreement (GSPA), including on determination of gas prices, tenure of the contract, and restrictions in the scope of the agreement to only three gas fields in the entire Krishna-Godavari (KG) basin D6 block.
“It was expected that the existing GSPAs will be extended for the further period with revised price as notified by the government of India; however, RIL has made substantial amendments in the draft GSPA. Most of the changes in the GSPA (have) resulted in substantial dilution of sellers obligations and put onerous responsibilities and additional financial burden on the buyers," Chandra said in the letter, which Mint has reviewed.
With the initial five-year GSPA expected to expire on 31 March, RIL had forwarded the new draft GSPA to fertilizer companies on 6 March.
“RIL is in discussions with the buyers for finalization of the GSPA. In the meantime, to facilitate continuation of supply, RIL has provided Term Sheet to the Buyers which will be valid till it is replaced by the GSPA," a spokesperson for RIL said in an emailed response to queries.
The controversy comes in the backdrop of the new gas price that is to be implemented from 1 April.
Top among the Fertilizer Association of India’s (FAI) concerns with the new GSPA is that RIL envisages determining the gas price on its own instead of using the gas price notified by the oil ministry.
The cabinet had in December approved the shifting to a new gas-pricing regime indexed to major global liquefied natural gas hub prices.
Under this, the price for April to June will be calculated based on the averages for the 12 months ended 31 December 2013 and it is expected that the rate in April will be around $8/million British thermal units (mmBtu), nearly double the government-fixed price of $4.2/mmBtu that RIL currently charges for KG-D6 gas supplied to urea manufacturing plants.
Arvind Kejriwal’s Aam Aadmi Party has made this an election issue, accusing RIL of creating an artificial shortage to raise prices of gas produced in the KG basin off the Andhra Pradesh coast. RIL has denied the allegation.
With the Lok Sabha elections to be held from 7 April to 12 May, the petroleum ministry earlier this month approached the Election Commission of India for its approval to implement the new price regime.
The model code of conduct bars any significant policy announcement or change ahead of an election; it became effective with the announcement of the Lok Sabha election dates on 5 March.
“It has come to us. We will look at it with an open mind," said India’s chief election commissioner V.S. Sampath.
FAI, after consulting with its members, wrote to the fertilizer secretary on 18 March listing eight areas of concern arising from RIL’s new GSPA. The fertilizer secretary pointed out these concerns in his letter to the oil ministry.
Fertilizer companies had sought at least five-year GSPAs, similar to the agreement signed in 2009, but RIL’s draft proposes three-month tenures.
“The proposed GSPA is only for one quarter i.e. up to June 30, 2014, and further extension is on a quarter to quarter basis at the discretion of sellers. Buyers cannot seek extension. Gas being the mainstay for plant operations, the fertilizer industry need to have long-term gas supply agreement and cannot depend upon short-term supply contracts," the letter notes.
The GSPA also has been amended to restrict the scope of GSPAs to only three gas fields instead of the entire KG-D6 or KG-DWN-98/3 block. RIL produced a total of 13.28 million standard cubic metres per day (mmscmd) of gas from D1 and D3 gas fields and the MA oil and gas field in the KG-DWN-98/3 (or KG-D6 block) in the week ended 9 March. This includes 8.17 mmscmd from D1 and D3 and 5.11 mmscmd from MA field. The output of gas from RIL’s D1 and D3 fields has fallen to just over 13 mmscmd from a peak of 69.43 mmscmd in March 2010.
RIL attributed the steep fall to geological complexities, a natural decline in the fields and higher-than-envisaged water ingress.
The GSPA also proposes a marketing margin of $0.135/mmBtu to be levied on gross calorific value instead of net calorific value, which will effectively increase gas margins by 11%.
The proposed GSPA also potentially increases the tax liability on fertilizer companies. “The scope and definition of taxes has been widened to such an extent that the buyer is liable to pay all the taxes which are even contingent, potential, or subject to challenge as to validity, efficacy or amount," Chandra wrote in his letter.
FAI also claims that the draft GSPA absolves RIL from all liabilities and obligations and does not give any assurance on the supply level, while transporters insist on a firm obligation backed by ‘Ship or Pay’ liabilities.
Under the existing agreement, RIL is liable to reimburse fertilizer companies any ‘Ship or Pay’ liabilities in case of a reduction in gas flow. This clause has been deleted in the draft GSPA.
RIL’s obligation to supply gas at a pressure required in the transporters’ facilities is also diluted in the draft GSPA, which says RIL will supply gas at a pressure as available in its own facilities.
“If the supply pressure goes down below what is acceptable to the transporter, gas supply will be stopped," the fertilizer secretary said in his letter.
The price of urea, the most widely used fertilizer, is highly subsidized and fixed by the government. The last major revision was on 1 April 2010, when the price was increased to ₹ 5,310 a tonne from ₹ 4,830 a tonne. In October, the price was marginally increased to ₹ 5,360 a tonne.
India produces about 22 million tonnes (mt) of urea a year and consumes a little more than 30mt. The gap is met by imports. The fertilizer industry consumes 31.5 mmscmd of gas from domestic sources and receives the top priority in allocation of domestic gas.
According to a report by the Standing Committee on Finance, the cost of urea production will increase by ₹ 1,384 per mt with every increase of $1/mmBtu in gas prices, thus increasing the subsidy burden on the government.
Therefore, if gas prices were to rise by $4/mmBtu, then the resultant burden on the exchequer would be around ₹ 9,000 crore.
RIL must have been prompted to make the move considering that the situation at the KG-D6 basin has totally changed from when the original GSPA was signed back in 2009, said an executive from a leading consulting firm, requesting anonymity.
“The production from the block has fallen from a peak of around 60 mmscmd to about 13-14 mmscmd now. Also, they are unsure as to what kind of production to expect going ahead and might therefore be looking to safeguard themselves against any liabilities in case of fall in production, etc," the executive said. The executive added that it will be difficult for RIL to have a say in matters related to gas pricing and allocation as this is determined by the government.
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