Supply pact ends when Mukesh enters gas-based power in 2022

Supply pact ends when Mukesh enters gas-based power in 2022

Mumbai: The revised gas supply master agreement (GSMA) between Mukesh Ambani-controlled Reliance Industries Ltd (RIL) and Anil Ambani’s Reliance Natural Resources Ltd (RNRL) will end on 31 March 2022, when the former is ready to enter gas-based power generation, in line with a non-compete agreement signed by the two on 23 May.

In the original pact, signed in 2006, RIL was to supply gas to RNRL for 17 years. The revised master agreement is silent on the tenure of the pact even though the gas purchase agreements that will be signed after the Supreme Court approves it could be longer than 12 years.

People in RIL and Reliance- Anil Dhirubhai Ambani Group (R-Adag, of which RNRL is a part) familiar with the matter said the gas sales and purchase agreements (GSPAs) that RIL will sign with individual entities of R-Adag, which are constructing the power plants, could have a validity of more than 12 years, beyond 2022.

The revised agreement filed in the Bombay high court on 30 June and reviewed by Mint says as much. It was signed on 25 June.

Spokespersons of both RIL and R-Adag declined comment.

“The tenure of GSPAs can be much longer and are likely to be sufficient for the lifespan of the Dadri project," said a person familiar with developments at R-Adag, adding that the lifespan of the 7,800MW power plant being set up at Dadri, Uttar Pradesh, by Reliance Power Ltd (R-Power), is around 15-17 years. RNRL is being merged with R-Power.

Interestingly, 2022 is also the year in which RIL can enter the business of gas-based power generation according to the new non-compete pact between the brothers. “The tenure of the agreement is in tune with future plans of RIL to enter into gas-based power generation when it is allowed to do so in 2022," said a person familiar with developments at RIL, who did not want to be identified.

Analysts say that the tenure of GSMA has been calibrated in a manner that would help RIL take a view regarding its own needs for gas as fuel vis-a-vis RNRL and other buyers. “RIL might fix a contract for a certain volume of gas now and review the situation post 2022, depending on its own need for gas as fuel for any potential power projects," said an oil and gas analyst with a domestic brokerage, who spoke on condition of anonymity.

The two companies have also agreed that if the government allocates gas to RNRL before its “affiliate" companies are ready with the relevant power plant, then “subject to the then-approved development plan, the parties may execute...a GSPA in accordance with the timelines, if any".

The government, which owns all natural resources, decides who gets gas and how much of it.

The agreement also mentions that in the event the “applicable price" of gas approved by the government is revised during the tenure of a GSPA, then the new price shall become the applicable price. The price of natural gas from the Krishna-Godavari basin is fixed at $4.2 (Rs196.56) permillion British thermal unit (mmBtu) at present.

In the 2006 master agreement, RIL and RNRL had agreed on a price of $2.34 per mmBtu for the gas. Following government regulations that priced natural gas higher than the agreed price, RIL claimed inability to adhere to the original gas pact.

On Sunday, R-Adag announced that RNRL would merge with R-Power in a deal whereby shareholders would get one share of R-Power for every four held in RNRL.