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CCEA allowed RIL to sell gas at higher price with bank guarantee

Dec 20, 2013 17:38 IST

The Cabinet Committee on Economic Affairs (CCEA) resolved the issue of Reliance Industries (RIL) to sell KG-D6 block gas at a higher price with effect from April 2014.

RIL has been asked to provide bank guarantees that would be in force till an international court of arbitration gives its final ruling on whether RIL has willfully violated contractual obligations on 80 per cent of committed gas output or resorted to hoarding.

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The government said that details of the bank guarantee including its periodicity would be worked out by January 2014, taking into account the law ministry’s views. According to the government, the short-supply of gas at KG-D6 so far has been around 1 trillion cubic feet.

About New pricing Formula
The new pricing is based on the Rangarajan committee formula. The new formula will be valid for five years and applies only to new contracts or renewals when existing ones expire. It does not apply to contracts which contain a specific formula for natural gas price indexation or fixing.
As per the Rangarajan formula, beginning 1 April 2014, all domestic gas will be priced at an average of international hub prices and the cost of LNG imported into India.

The increased domestically produced gas price in the country would hover around 7-8/mmBtu dollar at the current rate. This would be almost double that of the current rate.

This would also result in higher subsidy outgo, as the input costs for fertiliser and gas-based power plants will go up.

Benchmarks
There are two broad elements which are used for an average which will be used as an unbiased arm's length price.

These are
1. A price obtained by taking the cost of liquefied natural gas (LNG) imports into India under long-term contracts and removing charges such as transportation to obtain a theoretical price at the point of production in exporting countries. This is known as the netback price. The government decided not to include spot import costs. It will be a weighted average.
2. The weighted average of prices at three major gas trading points - the hub price at Henry Hub in the United States, the price at the National Balancing Point of the UK and the netback price at sources of supply for Japan.

Review date
The main departure from the Rangarajan proposals was to review prices quarterly, rather than monthly, in an attempt to smooth volatility and allow better planning of investments.
For both pricing elements, the formula will take the average prices for the four quarters preceding the quarter before the review.
So for the quarter starting 1 April 2014, the formula will be based on the four quarters ending 31 December 2012.

KG- D6 block
Krishna-Godavari Basin is a river basin in India. It is spread across more than 50,000 square kilometers in the Krishna River and Godavari River basins in Andhra Pradesh.  The site is known for the D-6 block where Reliance Industries discovered the biggest natural gas reserves in India in 2002. It was also the world's largest gas discovery of 2002.

 


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Read more Current Affairs on: CCEA , RIL , New pricing formula of RIL , Bank guarantee of RIL

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