Reliance Inds stares at a flood of gas

Reliance Industries (RIL) will request the government to expedite the process of finding buyers for the natural gas produced from its D-6 block in the Krishna Godavari basin.

On Thursday, PMS Prasad, CEO of the firm, was in the capital to put across his firm’s views to oil ministry officials.

“The production capacity has already reached 37 mmscmd (million cubic metre per day), but consumption is only around 25 mmscmd,” pointed out a company source. “We sent draft purchase agreements last week to the three steel companies approved by the government, but the contract is yet to be inked,” he added.

RIL’s inability to fully utilise its full production capacity stems partly from the highly regulated nature of the selling process.

During the last three years, the government has interpreted its rights under the production sharing contracts it signs with oil and gas exploration companies to include ‘guidelines’ governing the sale of the hydrocarbons produced.

Under these guidelines, the government reserves the right to determine the recipients of the natural gas produced by the contractors and companies such as RIL cannot sell gas to anyone else.

Under the policy thrashed out by an empowered group of ministers in 2007, the first 40 mmscmd of gas produced by RIL was supposed to have been parcelled out between power plants, fertiliser plants and CNG, LPG and piped gas projects.

RIL is expected to reach a production capacity of 40 mmscmd by end of July.
Yet, RIL has run into oversupply issues even as its production has hit just 35 million cubic metres, despite being given the go-ahead to sell gas to 3 steel makers.

It is currently gearing up its production capacity uniformly every month to reach a total of 80 million cubic metres per day by the end of 2009. “We have signed agreements for around 29 mmscmd, but RGCPL (Ratnagiri Gas and Power, formerly Dabhol Power) is unlikely to need its 2.7 mmscmd till september due to their pre-existing contracts. On top of this, some of the fertiliser companies are not fully utilising their allotments,” the source added.

“The negotiations with steel companies are on,” he added.

As a way out, RIL is likely to push for larger supplies to existing power companies and a further diversification of the customer profiles to captive power plants within factories as well as makers of ceramics, glass etc.. Against an anticipated demand of 18 million cubic metres from power companies, RIL has so far signed agreements only for around 11.1 mmscmd. “We have been told to supply gas to run the power projects at 60% load. Increasing the load factor can help us sell more,” the official said.

Another factor for the glut has been the absence of the National Thermal Power Corp (NTPC), which has a total consumption capacity upwards of 13 mmscmd.

The company is engaged in a legal dispute with RIL after the latter pulled out of a bid to supply 12 mmscmd of gas at $2.34 per unit for 17 years in 2005, objecting to indemnity clauses contained in the draft supply agreement supplied by NTPC.

While RIL has been pushing for NTPC to buy gas at higher rate of $4.2 per unit, the latter has been resisting, pointing to the ongoing court case.