Mukesh Ambani’s Reliance drops gas price challenge against govt

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New Delhi: Billionaire Mukesh Ambani-led Reliance Industries Ltd (RIL) and its partner BP Plc have withdrawn an arbitration process initiated against the government on natural gas pricing to facilitate further development of the offshore KG-D6 block in the Krishna-Godavari basin and take advantage of the prevailing low cost of oilfield services in global markets.

The move will help the companies boost hydrocarbon production over the next few years and benefit from the higher price allowed for gas from difficult deep sea fields while aiding the government’s strategic goal of lowering import dependence in hydrocarbons.

Withdrawal of arbitration proceedings is a precondition for RIL-BP being allowed to claim a higher price for the gas produced from their allotted fields, according to the gas-pricing policy announced by the government on 10 March 2016.

“Yes. The ‘gas price’ arbitration has already been withdrawn,” BP said in response to an emailed query from Mint. An email sent to RIL remained unanswered till the time of going to press.

A person who was privy to the discussions between the consortium and the government, speaking on condition of anonymity, said: “It is a pragmatic move. Cost of oilfield services is low at this juncture and this is the best time to invest in developing deep sea discoveries.”

Mint had reported on 11 April 2016 that the consortium and the oil ministry had initiated discussions to drop the arbitration. Disputes in the high-risk and capital-intensive hydrocarbon sector are common globally and companies work with national governments despite ongoing disputes.

According to a Union cabinet decision of 10 March 2016, if there is arbitration or litigation directly pertaining to gas pricing initiated by companies, the new liberal pricing policy will apply only on conclusion or withdrawal of such disputes.

To capitalize on the liberal pricing and free marketing regime, RIL and BP on 15 June announced a plan to invest Rs40,000 crore to bring on stream a total 30-35 million cubic metres of gas a day over 2020-2022.

The initial investment will go into developing ‘R-Series’ deep water gas fields in KG D6 at depths of over 2,000ms, about 70km offshore.

RIL initiated arbitration in 2014, demanding implementation of a pricing formula developed by the previous United Progressive Alliance (UPA) government. Enforcing that formula would have doubled the price from the then prevailing $4.2 per million British thermal units (mmBtu) from 1 April 2014.

However, the UPA government could not go ahead due to the model code of conduct ahead of the Lok Sabha election and the Narendra Modi administration subsequently modified the formula.

JP Morgan India Pvt. Ltd said in a note on Friday that as per the new formula, the current ceiling price from deep water fields is $5.56/mmBtu on a gross calorific value basis.

State-run Oil and Natural Gas Corp. also announced a $5 billion investment in two fields in the Krishna-Godavari basin on 29 March last year after the government announced the liberal pricing for natural gas extracted from deep-sea blocks.