Corporate Jul 2, 2012
New Delh: The Petroleum Ministry looks set to reject the price Reliance Industries has proposed for gas it will produce from below coal seams, CBM, citing a 2010 ruling of the Supreme Court that had not commented on CBM pricing.
The ministry's technical arm, the Directorate General of Hydrocarbons (DGH), had in April concurred with RIL proposal to price coal bed methane (CBM) from its Madhya Pradesh block
at import parity price just as is done in case of oil.
But the ministry wants DGH to review its decision in the light of Supreme Court ruling in the gas row between RIL and RNRL, sources privy to the development said. The ministry on June 13 wrote to Director General DGH saying the Supreme Court had in its May 7, 2010, judgement stated that "Allocation of natural gas made by the EGoM (Empowered Group of Ministers) cannot be overridden by a contractor through a private arrangement.
"Supplies of natural gas can only be made in accordance with the policies of the government and subsequent guidelines issued by Ministry of Petroleum and Natural Gas on Pricing and
Commercial Utilisation of Coal Bed Methane."
Sources said the Supreme Court had ruled on pricing of natural gas and its allocation as contained in the Production Sharing Contract (PSC) signed for oil and gas blocks. It did
not comment on CBM contracts, which are different than those of oil and gas blocks.
Also, the ministry in the letter to DGH quoted the Supreme Court ruling of May 2010 to say supplies of gas can be made on the basis of "guidelines issued by MoPNG on Pricing and Commercial Utilization of CBM". While the Supreme Court had not commented on CBM pricing, the CBM guidelines that ministry said was part of the apex court judgement were actually issued on June 15, 2011, more than a year after the ruling.
Sources said DGH had on April 12 written to the ministry saying the bidding process followed by RIL to discover price of CBM to be produced from its Sohagpur block was in "compliance with Article 18.6 of the CBM contract and subsequent guidelines issued by MoPNG dated June 15, 2011 on 'Pricing & Commercial Utilization of Coal Bed Methane (CBM)".
"Out of 73 bids received by contractor, 70 seem to be from unrelated and non affiliate parties and, therefore, appear to be at arms length," the DGH wrote. The ministry however stated that "the operator (RIL) should call for bids from identified priority sectors/customers for CBM gas price," sources said adding the letter to DGH listed fertilizer and power plants as priority sector.
But a controlled selective bidding would defeat the purpose of discovering market price of gas as enchrined in the PSC, they said. In the bidding process followed by RIL for discovering
price of CBM, fertiliser firms like RCF made ridiculous bids. If they offer was accepted, RIL would have not just supplied 2.5 million cubic meters per day of gas free of cost but also
pay $2.75 per million British thermal unit (mmbtu) to the fertiliser firm. RIL had invited companies to quote a variable 'v' that can be added or subtracted from its CBM pricing formula of 12.67 percent of JCC, or Japan Customs-Cleared Crude, plus $ 0.26 per mmBtu.
RCF quoted a negative 15.05, sources said adding at $95 per barrel oil price, this translated into RIL paying $ 2.75 per mmBtu to the fertiliser firm besides supplying gas. Tata Chemicals Ltd quoted a price of a measly $1.55 per mmBtu. Indo Gulf Fertiliser Ltd, Nagarjuna Fertilisers and Chemicals Ltd, Deepak Fertiliser and Petrochemical Corp Ltd
and National Fertiliser Ltd too quoted a negative value of 'v' ranging between 9.45 to 10.38.
Despite these, the company's pricing formula of 12.67 percent of JCC plus $0.26 per mmBtu had generated a demand six times the 3.5 mmcmd gas it will produce from Sohagpur blocks.
At $100 per barrel oil price, CBM from RIL's Sohagpur CBM blocks in Madhya Pradesh will cost $12.93 per mmBtu. The pricing formula RIL has proposed for CBM is different
from the one natural gas from the company's eastern offshore KG-D6 block is priced at. KG-D6 gas at cap crude oil price of $ 60 per barrel translates into a sale price of $4.205 per mmBtu. Sohagpur CBM at $60 per barrel oil price would be $7.862 per mmBtu.
More From R Jagannathan.