Reliance Industries Limited and its partners BP and Niko Resources Limited in the KG-D6 gas block have served a notice of arbitration to the government seeking implementation of the Domestic Natural Gas Pricing Guideline 2014 notified in January this year.
“The continuing delay on part of the Government of India in notifying the price in accordance with the approved formula for the gas to be sold has left the parties with no other option but to pursue this course of action,” a joint statement by the three companies said.
“Without this clarity, the parties are unable to sanction planned investments of close to $ 4 billion this year. In addition, this will also delay the ability of the parties to appraise and develop other significant discoveries made last year. Overall, the parties were planning to invest $ 8-10 billion in the next few years to significantly increase production from the KG D6 block,” the statement added.
Explaining the reason behind the notice of arbitration, the companies said they were unable to plan their future investments since implementation of the Cabinet decision which approved the Rangarajan Committee price formula in 2013 had been deferred leading to lack of clarity on gas price from April 1st, 2014.
The Committee under Dr. C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister, which was constituted by the Ministry of Petroleum and Natural Gas to look into the Production Sharing Contracts mechanism in the petroleum industry, submitted its report in December 2012. The report proposed a formula for pricing of gas based on market prices across the world for a period of 5 years before transitioning to gas-on-gas competition. The objective was to facilitate a transition to arms-length market prices. In June 2013, the Cabinet Committee on Economic Affairs endorsed the pricing formula for all domestic gas produced from April 1st, 2014. The MoPNG subsequently published guidelines for implementation of the new gas price formula in January 2014. It was mandated to compute and notify the new gas price for the quarter April to June 2014 by early March 2014. However, on March 24th, the Election Commission advised that the announcement with regard to new gas price for the quarter starting April 1st be deferred till the Model Code of Conduct was lifted. The matter was also kept on hold as it was sub judice in the Supreme Court.
The companies said that they were being forced by the MoPNG to sell gas at $ 4.2/mmbtu even though their contracts to sell gas at that price had expired on March 31st, 2014. Following expiry of the contracts, the new gas price was supposed to be calculated using the CCEA-approved pricing formula proposed by the Rangarajan Committee.
“We are the only NELP block that is selling gas today and our contracts to sell gas at $ 4.2/mmbtu expired on 31 March 2014,” the companies said in the statement.
The MoPNG has refused to heed to the request made by the companies for announcing new gas prices, effective from April 1st, 2014, immediately after lifting of the MCC. Instead, it has indicated that gas prices would be announced for the second quarter of the year.
“This contradictory move has resulted in a loss to the contractor group and the government of Rs. 300 crore per month,” the statement said.