The Hindu : Business : RIL gas pricing formula approved

Online edition of India's National Newspaper
Thursday, Sep 13, 2007
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Business

RIL gas pricing formula approved

Ashok Dasgupta

EGoM cuts price by 8.32 p.c. to $4.20

Excludes exchange rate fluctuations
from the formula
Lowers the ceiling of crude to
$60 instead of $65 a barrel

NEW DELHI: In a strategic win-win decision, the Centre on Wednesday approved the pricing formula of Reliance Industries Ltd. (RIL) for the natural gas to be produced from its Krishna-Godavari (KG-D6 block) basin while scaling down the fuel price by 8.32 per cent to $4.20 per million metric British thermal unit from the proposed $4.33 per mmBtu.

With this pricing resolution worked out by the Empowered Group of Ministers (EGoM) headed by External Affairs Minister Pranab Mukherjee, it not only brings the months of uncertainty over the issue to an amicable end but also paves the way for the next round of auctioning of oil and gas blocks.

With the objective of lowering the price of gas for consumers, the EGoM excluded the exchange rate fluctuations from the pricing formula and also lowered the ceiling of the crude to $60 a barrel instead of $65.

“The above decision of the EGoM will lead to a gas price of $4.20 per mmBtu at delivery point which translates into a price of Rs. 172.20 per mmBtu at the prevailing Indian rupee-U.S. dollar exchange rate,” an official statement here said. Earlier, RIL had proposed to price its gas from KG-D6 at $4.33 per mmBtu or Rs. 187.84 per mmBtu.

In acceptance of RIL’s gas pricing mechanism, the statement said: “The EGoM decided that the price basis/formula submitted by Reliance Industries and its partner Niko Resources, may be accepted with modifications as per the recommendations of the Prime Minister’s Economic Advisory Council (EAC), including denomination of the entire formula in U.S. dollars.” Henceforth, for all oil/gas fields awarded in six rounds since 2000, the natural gas price calculation is to be pegged at a constant of $ 2.50 per mmBtu.

NELP-VII

“This will pave [the] way for launch of NELP-VII,” Petroleum Minister Murli Deora said following the EGoM’s decision as the Centre had postponed the bidding round for exploration acreage on apprehensions of a likely backlash from foreign investors over pressures being built on the Government to renege on its commitment to permit market-determined prices.

The EGoM decided that the ceiling for price of crude oil in the variable portion of the pricing formula would be frozen at $60 a barrel instead of $65 as proposed by RIL-Niko so as to “translate into a lower consumer price by reduction in the ceiling of crude price.” This price basis/formula would be valid for five years from the date of commencement of first commercial production and supply, the statement said.

‘Arms-length’ basis

The price discovery process on the ‘arms-length’ basis is to be adopted in the future NELP contracts only after the government approves the price formula. “The price discovered through this process would be applicable to all the sectors uniformly,” it said.

The production of gas from the RIL’s KG-D6 block is expected to commence from July next year with an initial estimated production of 40 million standard cubic metres a day.

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