By Bloomberg

By Bloomberg

RIL ready to buy all CBM gas it produces

RIL ready to buy all CBM gas it produces

Mumbai: Reliance Industries Ltd (RIL) has told the oil ministry it is willing to purchase all the coal bed methane (CBM) gas produced by the company for its own consumption, if there were no buyers for the fuel at the price based on the formula drawn up by the firm.

By Bloomberg

The company wants to charge the highest possible price its CBM gas can fetch and feels there may be firms outside those identified by the government from the so-called priority power and fertilizer sectors willing to pay those prices. The government, on the other hand, wants to ensure that enough of the feedstock reaches power and fertilizer companies that have been hit by shortages, mostly due to declining supply from RIL’s D6 block.

Since RIL has already submitted its pricing formula for gas produced from the CBM block it operates in Sohagpur, Madhya Pradesh, and the government is yet to approve this, the company wrote to the ministry on 24 November saying it has “given an unequivocal commitment to offtake the entire quantity or any such balance quantity of gas for which there are no willing buyers at the proposed prices."

“Given RIL’s commitment for offtake, the price proposed clearly represents the maximum fair value that the gas can fetch in the region," RIL’s letter stated. Mint has reviewed a copy of the letter.

An email sent to RIL on Friday seeking comments for the story remained unanswered. An email sent to the oil ministry on Thursday did not elicit any response. Analysts said the matter was an issue of policy on which the government needed to take a view one way or another.

The standoff between the government and RIL with respect to pricing and identification of customers for CBM gas began last July, when the Directorate General of Hydrocarbons (DGH) notified to RIL certain guidelines regarding pricing and the commercial utilization of the fuel.

Among other things, the DGH letter stated that customers of CBM gas should be selected by the operator (RIL) from the proposals received from relevant ministries and state governments on the basis of the government’s gas utilization policy.

RIL should discover the price for such gas from this set of buyers by inviting bids, it stated.

To this, RIL replied on 2 September that the guidelines “adversely impacted" its contractual rights and the “unilateral changes" made without RIL’s consent materially affect its financial interests and the basis on which it had invested in this business.

The company argued that according to the original contract signed with the government, it was free to market the gas as it chose, at “market-determined prices" arrived at through the principle of “arm’s length sales", or sales made freely in the open market between willing and unrelated sellers and buyers.

Restrictions on discovering the price for CBM gas from a select list of priority sector customers made it impossible to discover a “true competitive arm’s length price", RIL said, which would also prevent maximization of revenue to the operator and the government, since the latter is entitled to a share of the revenue earned from the marketing of such gas.

Subsequently, in a 16 September letter, RIL proposed a pricing formula based on its finding that the best price for this gas was available in the region along the Hazira-Vijaipur-Jagdishpur pipeline, where existing customers were procuring imported liquefied natural gas (LNG). Mint has reviewed all three letters.

An oil ministry official, speaking on condition of anonymity, said any marketing of natural gas in the country, including from RIL’s CBM blocks, will have to be in line with the gas utilization policy finalized by an empowered group of ministers.

In May, this group of ministers, headed by finance minister Pranab Mukherjee, had decided that any natural gas available, mostly from the D6 block—India’s largest gas find off the eastern coast, also operated by RIL—will have to be allocated to core sector users such as power and fertilizer companies.

The decision was taken in the wake of declining gas output from D6, last reported to be around 40 million standard cu. m per day (mscmd), way below the envisaged peak production of 80 mscmd.

“The principle of arm’s length is only for determination of the price of the gas and if any gas is available after meeting the requirements of the core sector, a call will be then taken if RIL can be allowed to use such gas for its own purposes," the official said.

While seeking approval for this price, RIL told the ministry that around 30 mscmd of imported liquefied natural gas was being sold in this region at “even higher prices" than what the company proposed, mostly to power and fertilizer firms.

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