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Business News/ Companies / People/  No gas pricing freedom for RIL if arbitration continues
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No gas pricing freedom for RIL if arbitration continues

RIL will get pricing freedom only after the arbitration initiated in 2014 is either concluded or withdrawn

The new policy offers pricing freedom for gas discovered from deep, ultra-deep water and high-pressure and high-temperature areas that are yet to be developed for commencing production. Premium
The new policy offers pricing freedom for gas discovered from deep, ultra-deep water and high-pressure and high-temperature areas that are yet to be developed for commencing production.

New Delhi: Reliance Industries Ltd (RIL) won’t have the freedom to price natural gas produced from undeveloped deep-sea fields in the KG-D6 block so long as it pursues arbitration proceedings against the government, according to the hydrocarbon policy document unveiled on Thursday.

The new policy offers pricing freedom for gas discovered from deep, ultra-deep water and high-pressure and high-temperature areas that are yet to be developed for production.

“The pricing policy is self explanatory. Pricing freedom will be available to producers only when a pending arbitration is concluded or withdrawn," oil minister Dharmendra Pradhan said.

BP Plc., RIL’s 30% partner in the KG-D6 block, which houses many undeveloped discoveries otherwise eligible for free pricing, prefers RIL to drop the arbitration. The British energy company, which has business in more than 70 countries, follows a conciliatory approach in resolving disputes, which are very common in the energy business the world over.

“The recent decision by the government on “marketing including pricing freedom" for new production from deep, ultra-deep water, and high pressure high temperature areas, provides clarity to end the pending gas pricing dispute. BP and its partners will now focus on working closely with the government to develop resources and bring additional natural gas to market," said a BP spokesperson.

Emails sent to RIL and Niko Resources, a 10% partner in the D6 block, were not answered.

RIL has started production from the D1 and D3 fields in the D6 block, but there are many yet-to-be developed discoveries within the block. The liberal pricing regime for discoveries in deep sea and other difficult geological areas apply to existing and future discoveries that are yet to commence commercial production as of 1 January 2016.

Out of the 28 such discoveries which are eligible for pricing freedom, eight belong to RIL and are housed in two different blocks, accounting for 2.53 trillion cubic feet (tcf) of gas reserves, according to a presentation on the new policy prepared by the oil ministry.

The Oil and Natural Gas Corp. Ltd has 14 discoveries accounting for 3.2 tcf and Gujarat State Petroleum Corp. Ltd has one accounting for 1 tcf.

RIL initiated the arbitration in 2014 demanding implementation of the pricing formula developed by the previous United Progressive Alliance (UPA) government.

Enforcing that formula would have doubled the price from the then prevailing $4.2 per million British thermal unit (mmBtu) from 1 April 2014. However, the UPA could not go ahead due to the code of conduct enforced by the Election Commission ahead of the Lok Sabha polls. The Modi administration will allow pricing freedom once this thorny legal dispute is out of the way.

“In the case of existing discoveries which are yet to commence commercial production as on 1 January 2016, if there is pending arbitration or litigation filed by the contractors directly pertaining to gas pricing covering such fields, this policy guideline shall apply only on the conclusion/withdrawal of such litigation/arbitration and the attendant legal proceedings," said the detailed statement issued after Thursday’s cabinet meeting.

While withdrawing the arbitration would make commercial sense for RIL, it is not yet to be known whether such a move will in anyway prejudice the company’s legal rights relating to any possible future disagreements over the issue, said an industry executive, who declined to be named.

After assuming office in May 2014, the Modi government set the gas price at $5.6 a unit linking it to the average of prices in gas-surplus countries such as the US, Canada and Russia. The periodically revised price, currently at $3.82 a unit, is likely to be $3.15 from 1 April 2016.

To incentivize investments into oil and gas blocks to be awarded in the future under the Hydrocarbon Exploration Licensing Policy, the cabinet also lowered the royalty rates to be paid by energy producers after commencing production.

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ABOUT THE AUTHOR
Gireesh Chandra Prasad
Gireesh has over 22 years of experience in business journalism covering diverse aspects of the economy, including finance, taxation, energy, aviation, corporate and bankruptcy laws, accounting and auditing.
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Published: 11 Mar 2016, 10:39 AM IST
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