Gas production from Reliance Industries Ltd’s (RIL) KG D6 block in the Bay of Bengal has the potential to cut India’s import bill by 20%, or nearly Rs50,000 crore. RIL is currently producing around 40 million standard cu. m per day (mscmd) and says that although it can increase production to 60 mscmd immediately, it cannot because the government has still not provided it a list of companies that will get the additional gas. Edited excerpts from an interview with executive director P.M.S. Prasad:
Gas saga: RIL’s P.M.S. Prasad says that at a price of $4.2 mmBtu, the govt will make Rs80,000-85,000 crore over the life of the KG D6 field.
When are you going to hit the peak (production) of 80 mscmd?
We are ready to produce more than 60 mscmd and we are waiting for the government to give us more linkages to customers. Right now, they have given us linkages up to 40 mscmd. We have signed all agreements with NTPC. We are also almost delivering gas to people except one or two customers like Essar (Steel Ltd) and GAIL (India Ltd) who will be taking gas probably next week. Ratnagiri Gas and Power Pvt. Ltd (RGPPL), Dabhol, would start taking gas from 1 October. But otherwise we are almost there at 40 million. So, now we are eagerly waiting for the new eGoM (empowered group of ministers) to be formed so that the government can give us more linkages.
Is the government giving you a time frame? Do you lose money if you do not ramp up?
We do, a lot. The Rs35,000-36,000 crore that we have invested is Reliance’s money. It is Reliance shareholders’ money, the money that Reliance borrowed from the banks and if we are not able to earn revenues from these investments, it is a loss of present value.
One of the allegations is that you are deliberately not ramping up production, you are hoarding gas, you are artificially creating a scarcity. What are your thoughts on that?
I can only laugh because no one after having invested this much money would want to not produce. For the next five years, the gas price is fixed. So, how does it help me? Secondly, I have to repay my debt, so how does it help me not to get the revenues today. The only reason that we are not able to produce more is because of the procedural delays in forming the new eGoM and then giving us more allocations.
Because of what the government is not able to fast-track, you are not able to ramp up the capacity?
Absolutely. So on a lighter note, it is the government which is hoarding the gas, not Reliance.
The other thing which has gone against you in the recent few months has been the clarification that now the seven-year income tax holiday does not stand, what does that mean for you? What kind of a hit will you take?
It is a big hit because in the production sharing contracts and also in other supporting documentation, it is very clearly mentioned that both oil and gas are eligible for tax holiday. We can give a new definition to the mineral oil just for the sake of section 80IB and then say, this doesn’t include gas. But I think it is unfair and we have been made a promise based on which we all took so much risk and then put in these big investments and then when the investments are about to fructify, saying that the gas is not entitled to a tax holiday, I think is a bit unfair.
Can you give us a broad range, what could it mean for Reliance Industries?
It would be of the order of a couple of billion dollars over seven years, but I need to re-check the numbers. You are a financial channel, so you love to have the numbers. but I hate to give out numbers because these are very sensitive information.
But if you don’t get that income- tax holiday, would you consider arbitration? What would be the next step?
Yes, arbitration is the last resort but right now the government has said that since this matter is sub judice, let the courts decide. So, we will wait for the courts to decide in some of the pending issues. But if that decision doesn’t come through, then we do have to look at other means including arbitration.
The government has arrived at a pricing valuation of $4.2 per mmBtu (million British thermal units). Is this a reasonable price? Is it a competitive price?
Yes. I genuinely think it is a very competitive price for two reasons. One, compare it with the rest of the gas that is being produced and sold in India. Except in the administered price mechanism (APM) gas, all other gas that is being produced and sold is between $4.5 or between $4 and $5.7. That is a significant volume. Secondly, a lot of liquefied natural gas (LNG) that is being imported, either on contract or on spot basis, is also costing around $6. Each year, the price keeps going up as far as the contract LNG is concerned. So, imported gas is $6 plus, indigenously produced gas other than the APM is also in the range of $4-4.5, the minimum, to about $6. So, this is one aspect. Considering that this is deep-water gas, it takes a lot more effort and cost to produce it. I think it is a fair price... It is a market discovered price and that has been approved by the government.
Do you genuinely believe that the government’s revenues will be the maximum at a valuation as well as a sale price of $4.2 per mmBtu?
Higher the price, government’s stake will be higher because the contractor recovers its investment first and as the contractor recovers its investment, the government stake keeps on increasing. That is the first part.
The sooner you get profitable, the government’s share of profit petroleum increases that much sooner?
Exactly. The second part is higher the price, the quicker will be our cost recovery and then government will end up getting a higher and higher share of profits. But then government has to strike a balance between what is good for the consumers vis-à-vis what is good for the partners in the production sharing contract (PSC).
So, at $4.2 government calculations, they tend to make about Rs80,000-85,000 crore over the life of this field. I do believe those numbers.
So the government’s share at $4.2 is not the alleged Rs500 crore?
No. Rs500 crore is what they would make in the first year as royalty. So those numbers are plucked out of nowhere.
Is this figure also plucked out of nowhere—that NTPC may lose Rs30,000 crore if it is not sold gas at $2.34?
I will give you a different perspective to it. First of all, NTPC doesn’t lose anything. The reason is NTPC being a public sector undertaking (PSU), for them the fuel cost is a pass-through.
So, if they buy fuel at X dollars, that X dollars will be passed by NTPC to the state electricity boards. Today, if you take FY09 figures, NTPC’s cost of producing power from the Kawas and Gandhar plants is of the order of Rs5-6 per kilo; this is because they are using expensive fuels. If you take this KG D6 gas, that cost would come down by something like Rs2-3 per kilo.
So, how can you put an argument that they are going to lose Rs30,000 crore? It’s the other way round. By not buying our gas NTPC is losing money.