The Cabinet Committee on Economic Affairs (CCEA) on Thursday approved a hike in the price of natural gas from Reliance Industries‘ (RIL) operated KG-D6 basin from April 2014. The company will have to submit a bank guarantee, as decided by the ministry of petroleum, to realise the newly notified gas prices in the country.
“The decision is sentimentally positive for RIL, but financial impact will be reflected only after 2016-17 as actual incremental gas production will start flowing in then. In the near term there are no major benefits. The news, however, will boost overall investment sentiment in exploration and production. Private companies will be encouraged to invest more in E&P activities,” Dhaval Joshi, Research Analyst with Emkay Global Financial said.
Earlier the parliamentary committee on finance had questioned the government’s decision to allow RIL realise higher gas price from the KG basin as the company had failed to meet the stipulated supply of gas. The matter has gone for arbitration and it was suggested that until the arbitration is resolved the company should not be allowed to realise higher gas price.
The ministry of petroleum had communicated to CCEA stating 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 itself had proposed to the ministry of petroleum that the company shall submit a bank guarantee for the unmet amount of gas production until the issue gets 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.
According to initial estimates, KG-D6 output was to reach 80 mmscmd by April 2012. Production from D-1, D-3 fields in the block started in April 2009. After hitting a peak of 60-61 mmscmd in early 2010, the output started to drop. 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 officials in the ministry, 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 by way 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.