RIL, BP ready to drop arbitration over gas prices?
3 min read 11 Apr 2016, 12:40 AM ISTDiscussions initiated with govt; firms also signal intention to invest $10 billion over the next few years
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New Delhi: Is Reliance Industries Ltd (RIL) ready to bury the hatchet with the government over its dispute on natural gas prices, which is now in arbitration? Recent developments suggest so.
RIL and its partner BP Plc. have initiated discussions with the government to drop the arbitration, said an oil ministry official familiar with the developments but did not wish to be identified.
RIL-BP have also signalled their intention to invest $10 billion over the next few years to recover about 2.5 trillion cubic feet (tcf) of gas from deep sea fields that the combine expects to be allowed to sell at free market prices under the new gas-pricing rules, according to the official.
Withdrawal of arbitration is a pre-condition to RIL-BP being allowed free pricing of gas produced from their allotted fields, according to the gas-pricing policy announced by the government on 11 March.
RIL did not respond to an email seeking comment.
BP responded saying the company will work towards developing its joint venture assets. “The recent reforms announced by the Government of India will provide the much-needed impetus to the Indian oil and gas industry. Together with our partners, we are working with the government to progress activities in our blocks," BP said in a statement.
The minister of state for petroleum and natural gas, Dharmendra Pradhan, met executives of both the companies in the first week of April.
“The fact that the consortium is keen to discuss the issue with us indicates its willingness to drop the arbitration relating to government’s power to fix gas price," said a government official, who requested anonymity.
According to the Union cabinet decision, if there is an arbitration or litigation filed by the companies directly pertaining to gas pricing, the new liberal pricing policy will apply only on the conclusion or withdrawal of such disputes. Alternatively, they can avail of the new price ceiling linked to the landed cost of alternative fuels like fuel oil, naphtha, liquefied natural gas and coal.
The official said that it might take about a year for the companies to finalize the field development plan, sign equipment and services contracts and get the work started.
An executive with one of the companies agreed that by 2017, investments will flow into developing the deep-sea discoveries that are yet to be brought into production.
RIL initiated arbitration in 2014 demanding implementation of the pricing formula developed by 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 government could not go ahead due to the model code of conduct enforced by Election Commission ahead of the Lok Sabha election.
The current government modified the formula. As per this, the price is set at $3.06 mmBtu for the April-September period of 2016. This price applies to gas produced at present. The free pricing regime announced on 11 March is for discoveries that are yet to start production as on 1 January 2016.
A presentation by the oil ministry said that the pricing freedom will help in monetizing 6.5 tcf of gas valued at $28.35 billion, or ₹ 1.8 trillion. Of this, RIL has eight deep-water and ultra-deep water discoveries with 2.53 tcf gas. BP is 30% partner in RIL’s 21 gas blocks, including in the KG- DWN-98/3, known as KG D6.
Canada’s Niko Resources has 10% holding in KG D6.
In 2013, BP had said it will, along with Reliance, invest about $5-10 billion to quadruple gas production from the then 11.9 million metric standard cubic metres a day by 2020.
Implementing that investment commitment, however, got delayed due to what was seen as unviable gas prices.
State-run Oil and Natural Gas Corp. (ONGC) too announced its $5 billion investment in two fields in the Krishna-Godavari basin on 29 March after the government offered free market pricing for natural gas extracted from deep-sea blocks.
The two fields are forecast to yield 50 billion cubic metres of gas and 23 million tonnes of crude oil over their lifetime.
“Private sector players may be discreet about their investment plans. The positive impact of these upstream hydrocarbon investments to take advantage of the gas price reforms will be felt in the long term," said Kalpana Jain, senior director at Deloitte India.
