RIL's KG-D6 gas contract can't be terminated: Moily to PM
New Delhi: Amidst controversy over gas price hike, Oil Minister M Veerappa Moily has told Prime Minister Manmohan Singh that Reliance Industries' contract for KG-D6 gas fields cannot be terminated pending arbitration on issue of output lagging targets.
Moily in a 13-page letter to the Prime Minister explained the process, the contractual requirement and the steps followed for raising natural gas prices from April 1, without which several gas fields of both private sector firm RIL and state-owned ONGC would be economically unviable to produce.
Rebutting allegations by the AAP and its leader Arvind Kejriwal that the price increase was done to benefit RIL, Moily on February 14 wrote to Singh saying ONGC's average cost of producing natural gas was about USD 3.6 per million British thermal unit in 2012-13 and its newer finds in deepsea cost more than current rate of USD 4.2.
Public sector firms ONGC and Oil India Ltd (OIL) account for about 80 percent of India's gas production and will be the major beneficiary of gas rates going up from USD 4.2 to USD 8.
Kejriwal before resigning as the Chief Minister of Delhi had ordered the Anti-Corruption Bureau to register an FIR against Moily, RIL and its Chairman Mukesh Ambani for allegedly creating an artificial shortage of gas in the country and raising prices.
On gas production from RIL's eastern offshore KG-D6 gas fields lagging targets since 2010-11, Moily told Singh about the process initiated by his predecessor S Jaipal Reddy of penalising the firm by disallowing a portion of cost incurred.
While the contract provides for termination in case of a default by a contractor, Reddy in May 2012 had slapped penalty of USD 1.005 billion. RIL disputed the penalty and initiated arbitration.
"In view of the contractual provision under the PSC (production sharing contract), the government will not be able to terminate the contract on account of shortfall in production as the matter is pending before the arbitral tribunal," Moily wrote.
The production sharing contract (PSC) does not have any explicit provision for penalties in case of default. A contract can only be terminated in case of a default but Reddy used the penalty route in case of RIL.
Explaining the reasons behind raising natural gas prices from April, Moily said several gas fields of both RIL and state-owned Oil and Natural Gas Corp (ONGC) were economically unviable to produce at current rate of USD 4.2 per million British thermal unit.
Unless massive investment and technology are infused in the upstream oil and gas exploration and production (E&P), domestic production will keep on dwindling, he warned.
"In choosing the basis for fixing the gas price, it is tempting to think that by choosing a lower price we are assuring consumers the same amount of gas supply at a lower price.
"The fact is that the price formula affects the investment that will be undertaken in exploration and production and therefore the total volume of gas likely to be produced," Moily wrote in his letter.
At current rate of USD 4.2, many projects especially in high potential basins of Krishna Godavari and Cauvery are not viable. Many discoveries have not been declared commercial at current rates.
"Sticking to gas price of USD 4.2 will result in foregoing gas production from these blocks. Further the gas prices can be incentive for higher production in deepwater areas and production from marginal fields," he said.
For enhancing investment in E&P sector, it was important that producers in India get at least the average price of what producers elsewhere are getting. Or else producers will have the incentive to invest abroad and import LNG, he said.
Moily said keeping domestic rates artificially low would create a "perverse" incentive for E&P companies, reduce domestic gas exploration and production and encourage increased import of LNG at higher prices.
"This in turn would worsen the fiscal deficit and current account deficit and undermine the energy security of the country. The Indian economy can ill-afford such an outcome at this juncture," he said.
Moily said the principle of 'cost-plus' pricing was given up in favour of market-linked pricing for petroleum products in 2002, consequent to dismantling of Administered Pricing Mechanism (APM) regime for petroleum products.
"Moreover, natural gas pricing on cost basis is not provided for in the PSC. It will not be correct to consider only the capital investment on development," he said adding the per unit cost of gas does not have only one component of development cost.
"At the extant gas price of USD 4.2 per mmBtu, many of the existing discoveries will not be commercial to be developed and exploited," he added.
Explaining in detail the process followed in fixing gas price, he said an Empowered Group of Ministers headed by the then External Affairs Minister Pranab Mukherjee had in September 2007 fixed the USD 4.2 price for gas from RIL's KG-D6 fields for first five years of production.
The 2007 decision by the EGoM, which is a mini-Cabinet, fixing USD 4.2 as the price of gas from the eastern offshore KG-D6 fields was taken after two committees including one headed by the Cabinet Secretary reviewed the price discovered by RIL as per contractual provisions.
Further, in May 2012 a committee headed by C Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, was appointed by the Prime Minister on request of Moily's predecessor S Jaipal Reddy to suggest a pricing formula to be applicable from April.
Moily said the recommendation of that committee was taken to the Cabinet, which deliberated on the formula suggested by Ranagarajan twice over six months and approved it.
According to the Cabinet approval, all domestically produced natural gas, both conventional and non-conventional fuel like shale gas of public sector and private firms, are to be priced at 12-month average of rates prevailing on international hubs and actual cost of imported LNG.
Price of gas according to this formula will rise to about USD 8 from current USD 4.2 per mmBtu.