The Cabinet Committee on Economic Affairs had decided earlier to raise the price of domestic gas but the row on the issue still looks far from settled. In what could prove a setback for Reliance Industries Ltd (RIL), there is a proposal to deny it a higher price for gas produced from its D1 and D3 discoveries, if it is established the company artificially suppressed output in these fields.
The petroleum & natural gas ministry is set to seek the Union Cabinet's approval for this proposal. Simultaneously, the ministry has asked its technical arm, the Directorate General of Hydrocarbons, to decide soon on RIL's revised field development plan, which had forecast lower production. "This is a technical dispute and the ministry wants to sort the differences in the management committee on whether there was a deliberate hoarding of gas by them (the company) in anticipation of a price increase," said a senior ministry official close to the development.
RIL had last year filed a revised field development plan, with lower capital expenditure and gas production. The company had scaled down its two-phase capex plan for the D1 & D3 fields from $8.836 billion (proposed in 2006) to $5.928 billion.
If the plan is approved by the management committee, it would mean the government accepts the company's argument that the decline in gas production at KG-D6 block is due to geological problems. But, if the plan is rejected, the ministry is planning to bring in a third-party expert group to look into the issue of shortfall. "We aim to take a final decision on this by April 2014, so that they are not penalised unnecessarily if they are not at fault," said the official.
According to the ministry, the two-way strategy would be lined up for a solution to the current crisis. Even as the Cabinet decides on whether gas from these discoveries should be priced at old rates and whether there was an intentional production drop, the management committee will look into the company's revised field development plan.
The output estimates of the RIL blocks have come down from 10 trillion cubic feet (tcf) to about 3.5 tcf. "If an old rate is fixed till earlier commitments are met, that would be for gas produced from D1 and D3 only, and not the entire block," he added.
Earlier this week, P M S Prasad, executive director and board member of RIL, had indicated his company would be left with no choice except "arbitration" if it was forced to supply the committed gas at old price.
"I don't know if it is true. If it is, we have a problem. It is a violation of production-sharing contract. Then, whatever dispute mechanism is available, we will have to go by that," he had said.
The idea of dual pricing had first surfaced when a finance ministry letter had hinted at the possibility of pricing RIL's production shortfall at the current rate of $4.2 per million British thermal unit (mBtu), rather than going for the higher rate of about $8 an mBtu arrived at through a formula suggested by the Rangarajan committee.
The total shortfall in production during four years to 2013-14 was 154 million standard cubic metre a day (mscmd). If the company is not allowed a higher price of $8.4 an mBtu on this quantity, it would lead to a total saving of Rs 63,000 crore. The shortfall in production against approved targets was 5 mscmd in 2010-11, 28 mscmd in 2011-12, 55 mscmd in 2012-13 and 66 mscmd in 2013-14.
According to the 2006 development plan, D1 and D3 fields were to produce 61.88 mscmd from 22 wells in 2011-12 and 80 mscmd from 31 wells in each of the years after that. RIL has said that gas output has lagged projections also because of "substantial variance in reservoir behaviour and character being observed vis-a-vis the prediction and there seemed to be reservoir constraints in achieving the gas production rates". Also, pressure decline was several times higher than originally envisaged and early-water production in some of the wells was not predicted in the initial reservoir simulations, though overall field water production was small.
OUTPUT SLIP
* Last year, RIL had filed a revised field development plan, with lower capex and gas production
* RIL's two-phase capex plan for the D1 & D3 fields was lowered from $8.836 bn (proposed in 2006) to $5.928 bn
* The output estimates of the RIL blocks have come down from 10 tcf to about 3.5 tcf in the revised plan
* The total production shortfall during four years to 2013-14 was 154 mscmd
* If the company is not allowed a higher price of $8.4 an mBtu, it would lead to a total estimated saving of Rs 63,000 cr
Source: Buiness Standard
