New Delhi, Aug. 10 (PTI): Reliance Industries' bid to supply natural gas to state-run NTPC at a rate of 2.34 dollar per million British thermal unit was not in accordance with the government policy for pricing of the fuel, an Oil Ministry note said.

The Mukesh Ambani company had in 2004 offered a delivered price of 3.18 dollars per mBtu for gas from its eastern offshore Krishna Godavari block KG-D6 to NTPC's Kawas and Gandhar power plants in Gujarat.

"Based on the letters from Ministry of Power and media reports, it emerges that the price has been determined by adopting reverse auction scheme i.e. a bidder offering the lowest gas price was selected by NTPC. This procedure obviously is in contravention to the provisions of the Production Sharing Contract (that stipulates gas to be sold at maximum possible price)," the undated ministry note said.

The comments assume significance in view of observations by a Committee of Secretaries, which was asked to look into a new price formulation proposed by RIL, that approving an alternative price would weaken NTPC's case. The NTPC is in court seeking RIL to honour the 2004 bid, a firm contract for which had not be signed due differences over certain terms.

Stating that RIL had not yet approached the Government for gas price/formulae approval, the ministry note said price lower than market price would lead to lower government revenues and prior Finance Ministry nod would be required.

It further said the procedure adopted by Cairn Energy for selling gas from Lakshmi field off Gujarat, where open bids specifying all parameters such as gas quality, pressure and production profile to select consumers based on the highest price offered, was the right approach.

RIL has proposed to price gas coming out of KG-D6 from July 2008 at 4.33 dollars per mBtu to 4.58 dollars per mBtu.

Sources said while the CoS, headed by Cabinet Secretary K M Chandrasekhar, recognised RIL's contractual right to sell gas at market determined prices, it also did not overlook the views of key consumers in power and fertilizer sectors who wanted the rates to be brought down.

In view of the stalemate, the Prime Minister on August 6 constituted an Empowered Group of Ministers headed by External Affairs Minister Pranab Mukherjee to go into the issue.

Law Ministry, a source said, in its opinion on the issue stated that Production Sharing Contracts signed under areas like KG-D6 awarded under New Exploration Licensing Policy since 1999, should be honoured. PSC guarantee investors like RIL marketing freedom and a market determined price for oil and gas they find.

"The PSC explicitly has a role of the government for approving the prices or the formula for price of gas prior to sale of gas to consumers. Government does not have right to fix price. It can only approve or disapprove the price suggested by the contractor," the source said, quoting the Law Ministry's opinion.