Mumbai: The government’s decision to raise prices paid to domestic gas producers may have no immediate impact on Reliance Industries Ltd (RIL) as it remains locked in arbitration with the government, but the fine print of the gas pricing policy may be positive for the conglomerate led by Mukesh Ambani.

The gas pricing policy announced on Saturday says that companies operating in deep- and ultra-deep-water blocks will get a premium over and above the prevalent natural gas prices in the country.

The notification revised the current price of natural gas to $5.6 per million British thermal units (mBtu) from $4.2 per mBtu. These prices will be revised every six months.

“For all the discoveries after this decision, in ultra-deep-water areas, deep-water areas and high pressure-high temperature areas, a premium would be given on the gas price to be determined as per the prescribed procedure," said the government notification, which didn’t elaborate how the premium would be calculated.

This clause would be beneficial to RIL as most of its ongoing exploration activities are located in the deep-water area of the Bay of Bengal.

A call made to RIL seeking comment on the impact of the gas pricing policy and an email sent on Sunday morning remained unanswered.

According to Sanjeev Prasad, senior executive director and co-head (strategy), Kotak Securities Ltd, while a price of $5.6 per mBtu is not viable for RIL to invest in blocks such as NEC25 or CYD5 or the MJ1 discovery, the premium that the government plans to give to deep-water discoveries will be key.

“I would think the minimum price would be US$10/mBtu for deep-water discoveries to be viable," said Prasad.

Offshore hydrocarbon blocks are categorized on the basis of the depth at which they are located. While shallow-water blocks are those where hydrocarbon reserves are discovered at a depth of up to 100-500m, deep-water blocks are at a depth of around 1,000m.

Blocks at depths beyond 1,500m are categorized as ultra-deep-water blocks. Deeper blocks are typically more expensive to develop.

RIL’s hydrocarbon blocks such as CYD5 in the Cauvery basin, NEC25 in the Mahanadi basin and the flagship D6 block in the Krishna-Godavari (KG) basin are all deep-water blocks and hence the government’s offer of a premium over and above the domestic natural gas price is an incentive for it to go ahead and develop them. The premium would only be applicable for new discoveries.

“Government seems to have taken a well-considered decision on gas pricing. A differentiated price for deep and ultra-deep blocks would make these investment viable and would lead to more domestic gas production," said Debasish Mishra, senior director, Deloitte Touche Tohmatsu India Pvt. Ltd, while declining to comment on the impact on individual companies.

According to Deepak Mahurkar, director and leader of the oil and gas practice at consulting firm PwC India, investors must get an appropriate reward for the risk they undertake in deep-water blocks.

“For a large risk capital, to expect risk returns is reasonable. With the new policy, energy sector is entering into new era of premium on gas price for deep water and HPHT (high pressure-high temperature) blocks which will need high cost of development. The investors were requesting exactly for this," said Mahurkar.

A September report by IIFL Institutional Equities noted that almost 7.5 trillion cu. ft of gas reserves can be developed by RIL if it gets a better price. This can translate into almost 30 million standard cu. m of total production for the company.

“Considering most of RIL’s assets are in deep-water areas, I believe a premium over the current price of $5.6 per mBtu will encourage the company to explore and develop. Plus, the government has also kept a provision for six monthly revision, which will increase the base price of natural gas in the months to come," said Gagan Dixit, senior analyst with brokerage Quant Capital Ltd.

RIL is expected to see no immediate impact from the increase in current gas prices as the company remains locked in arbitration with the government over issues including shortfall in output from the KG-D6 block.

“The matter relating to cost recovery on account of shortfall in envisaged production from D1, D3 discoveries of Block KG-DWN-98-3 is under arbitration. Hence the operator would be paid the earlier price of $4.2/mBtu till the shortfall quantity of gas is made good," the government’s notification on Saturday said.

The difference between the revised price and the present price ($4.2 per mBtu) would be credited to the gas pool account maintained by GAIL (India) Ltd and its payout will depend on the outcome of the pending arbitration and any attendant legal proceedings, the notification added.

On 14 July, Dharmendra Pradhan, minister of petroleum and natural gas, said in a written reply to a question in the Lok Sabha that the ministry had disallowed recovery of $579 million to RIL and its partners BP Plc and Niko Resources Ltd in the D6 block of the KG basin on account of low production in 2013-14.

It is the fourth year since fiscal 2011, when the government disallowed the company from recovering the cost incurred in exploration and production of oil and gas from the KG basin due to a shortfall in production.

The government had disallowed a cost of $457 million for fiscal 2011, $548 million for fiscal 2012 and $792 million for fiscal 2013, taking the total disallowed cost to $1.8 billion.

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