The Union finance ministry has raised concerns over the petroleum ministry’s decision to allow Reliance Industries Ltd (RIL) to pay bank guarantee in lieu of gas supply shortfall from its KG-D6 block, though it has given in-principal approval to the proposal.
The oil ministry had asked RIL to provide a bank guarantee of $135 million every quarter to get a higher price for natural gas from April 1.
In its observation note sent to the petroleum ministry, the finance ministry said the acceptance of BG mechanism may dilute the government’s stated position before the different arbitration proceedings that the shortfall in gas production is on account of the fault of the producer and not geological surprises and that the terms and conditions of the production sharing contract have been violated by the producer.
According to the government sources, the finance ministry has also said that the bank guarantee may run into $9 billion if the arbitration case lingers on for “indefinite” period.
The finance ministry has also inquired about the likely course action the oil ministry will take in case RIL defaults on fulfilling its BG obligations.
The oil ministry had moved a note for Cabinet Committee on Economic Affairs in which it had said that there should not be any dual pricing for gas in the country post April 2014. All companies including RIL should get the price for natural gas based on the recommendations of the Rangarajan Committee.
RIL had itself proposed to the oil ministry that it would submit a bank guarantee for the unmet amount of gas production until the issue is resolved between the government and the company.
The D6 block is currently producing much lower than the supply commitment of about 80 mmscmd.
According to the estimates of the directorate general of Hydrocarbons, the shortfall in supplies from the D6 basin was about one trillion cubic feet (tcf).
According to the initial estimates, KG-D6 output was to reach 80 million metric standard cubic metre per day (mmscmd) of gas by April 2012. Production from D-1, D-3 fields in the block started in April 2009. At present, the output from D-1, D-3 fields stands at 9.5 mmscmd. Total output from D6 block that includes MA fields is around 11-12 mmscmd.
According to the ministry officials, if the government had paid lower price of gas to RIL from KG-D6 basin it would have amounted to lower revenues for the government in the form of royalty.
In June this year, the government doubled the price of natural gas in the country from $4.2 per unit to $8.4 per unit to be effective from 2014, saying it will increase the production of gas by encouraging private investment.
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