Report strengthens case that gas pricing is high, users claim

Report strengthens case that gas pricing is high, users claim

New Delhi / Mumbai: The government of Andhra Pradesh and some fertilizer and power companies claim that the report submitted by a committee of secretaries (CoS) on Reliance Industries Ltd’s (RIL) pricing of gas from its find in the Krishna-Godavari basin strengthens their hand in an ongoing tussle.

The CoS studied RIL’s pricing methodology and heard representations from all the stakeholders; RIL claimed its pricing was market-driven, while the users said it was too high. The committee submitted its report to the government on 3 August. On Monday, petroleum minister Murli Deora said an empowered group of ministers (EGoM) would resolve the issue.

“Our original stand has been that either we get the gas at a lower price from the producer (RIL) or the government of India give it to us at a subsidy out of their share of profit petroleum," said Shabbir Ali, Andhra Pradesh power minister. “We are not willing to pay more than $3 (Rs121.2) per mBtu (million British thermal unit) for gas from D6 (the RIL block where the find is). RIL’s stand of scrapping the project is a part of their posturing tactics," he added.

An RIL spokesperson declined to comment.

RIL’s gas could cost around $4.33 per mBtu at Kakinada. This price excludes marketing margins and transportation costs. The Andhra Pradesh government, which needs the gas to run several power plants, and companies such as Anil Ambani’s Reliance Natural Resources Ltd (RNRL) and NTPC Ltd have sought the gas at lower rates.

The issue, however, isn’t just related to pricing; it involves the rights of companies that win exploration blocks through a competitive bidding process that involves revenue-sharing (or production sharing) agreements with the government. Gokul Chaudhri, head of the energy and infrastructure practice at audit firm BMR & Associates, says RIL has the right to pricing specified in the contract. “Until the gas pricing controversy is resolved and in the private contractor’s favour, no global investor will make any bets on the Indian oil and gas sector."

Former power secretary, R.V. Shahi said that the uncertainty over gas pricing needs to be resolved at the earliest. “Otherwise it will work against the interest of both the consumers and the producers."

The concerns of the consumers such as the Andhra government comes from the fact that gas shortages are beginning to affect them. Out of Andhra Pradesh’s power generation capacity of 11,617.4MW, around 490MW is currently lying idle.

The CoS report states that, “prima facie, the formula appears to suffer from several infirmities in respect of the formula employed and the bidding process."

U.S. Jha, chairman and managing director, Rashtriya Chemicals and Fertilizers Ltd and chairman, Fertlizer Association of India, said that he expects gas prices to come down once the government takes a call. “Around 70-80% of gas is used by the power and fertilizer sectors, the prices of which are controlled by the government. If the output prices are controlled by the government, how do you expect input prices to be market driven?" he asked. “And what market forces are we talking about in a situation when there is shortage of gas and liberalization has not happened in the power and fertilizer industry?" added Jha.

Fertilizer units currently face a shortage of around 5.986 million standard cubic metres a day (mscmd) of gas, an estimated deficit of 21%. Demand for gas from fertilizer units is expected to almost double in five years, from 41.002mscmd in the current fiscal to 76.259mscmd in 2010-11.

The Union ministry of petroleum and natural gas estimates that India will need around 180mscmd of gas in 2007-08. The ministry expects supply to be around 81mscmd in that year and projects that the shortage will persist till 2012.

A senior NTPC executive, who did not wish to be identified, said that the company did “not agree with RIL’s gas pricing formula."

A spokesperson for the Anil D. Ambani Group said that “the production sharing contract stipulates that any price discovery should be open, competitive and transparent. RIL’s gas pricing is neither of that as it had invited a handful of end users for price discovery."

RIL is embroiled in a court case with NTPC and RNRL over the supply of gas from D6.


(Sangeeta Singh contributed to the story.)