Reliance Industries: The Success Story Continues

Dhirubhai was a karmayogi. He always believed in karma and his work spoke louder than announcements. He has delivered some of the marvels to Indian industries. Keeping up with his tradition, RIL has implemented several world class projects during last few years.

RIL, in the past four years, has set up a world class refinery in record time with investment of $6 billion, one of the most cost competitive refineries in the world. The second unit of Jamnagar Refinery is the sixth largest single location refinery in the world. With the commencement of 29 million tones per annum (MMTPA) new refinery, Jamnagar Refinery has become the world’s largest refinery complex. The second unit of Jamnagar Refinery has special features like World’s Largest FCCU, World’s Largest Coker, World’s Largest Aromatics Complex, and India’s largest Sulfur Recovery Complex. The refinery also has a large sized captive power plant of 450 MW.

It has also developed world class oil & gas exploration project off the coast of Andhra Pradesh in record time with investment of Rs 34000 crore. KG D-6 is one of the world’s fastest developed projects, 2.5 years less than world average of 9 years for similar projects. Field development cost of KG D-6 is about $5 billion oil equivalent (boe), much less than the world average of $10 - $12 boe. Despite the manifold rise in the commodity, equipment and rigs cost, operating in harsh weather conditions, RIL has managed to contain its capital cost for the project.

During all this while, RIL forayed into retailing and opened its first store in November, 2006. Within 30 months time of opening up its first store, RIL has set up a retail network of more than 900 stores of 17 formats, across 77 cities of the country, with more than 4.2 million square feet area. In the meanwhile, RIL also launched India’s largest hypermarket in Ahmedabad in 2007.

All these projects have become reality, not only dreams or announcements, in record time.

RIL shareholders and stake holders trust its intent as it has always delivered what it said before time and in most economical manner thus, keeping the trust built by Dhirubhai alive. RPL shareholders gained (not lost), both in short term as well as long term, by their investments in the stock, keeping up the tradition of Dhirubhai of handsome returns to shareholders.

RIL has not only made money for its shareholders but will also save $9 billion each year of Government which goes out in importing the oil. Gas from RIL operated KG D-6 block will increase India’s GDP by $103 billion at peak production and will improve country’s current account deficit by 0.60% by 2014. KG D-6 gas will also substitute 7% of India’s oil consumption in FY2010 and about 10-11% during FY2011-14.

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RIL justifies levy of marketing margin on gas sale

Reliance Industries has justified the levy of marketing margin on gas sale saying it was essential to cover risks and costs incurred in marketing of gas.

"The marketing margin being charged by RIL on sale of KG-D6 gas is fair and justified consideration for the risks and costs undertaken in the GSPA including such risks and costs beyond the delivery point," RIL President (Gas Business) wrote to Power Secretary H S Brahma.

Terming as illegal the market margin, Anil Ambani group firm Reliance Infra had refused to pay the levy prompting RIL to issue a notice for suspension of fuel supply for "default". NTPC has sought to know whether the margins levied by RIL had government's approval.

RIL said the USD 0.135 per mmBtu marketing margin over and above the price was to cover risks like sellers liabilities in case of non-supply, customers drawing less than their quota, non-payment of dues and settlement of disputes and claims on quality, quantity or terms of the GSPA.

While marketing margin is a charge for creation of market and servicing sale contracts, RIL had undertaken extensive activity to identify customers, execute and manage gas sales and purchase agreements (GSPAs), gas sales planning, daily gas sales operations, gas accounting and invoicing and collection, Sharma wrote.

Reliance Infrastructure had from this month stopped paying the levy to RIL, leading to the Mukesh Ambani firm RIL slapping a discontinuation notice.

Other gas marketers like state-run GAIL India also charge marketing margin. It charges USD 0.18 per mmBtu margin on sale of regassified-LNG and about USD 0.12 per mmBtu for gas from fields like Panna/Mukta and Tapti and Ravv.

"GAIL is negotiating to increase the marketing margin these fields to about USD 0.18 per mmBtu to bring it at par with marketing margin it charges on sale of R-LNG," Sharma wrote.

RIL said it had in its application to the government for approval of the price of KG-D6 gas had indicated that marketing margin would be charged separately to cover costs and risks in sale of gas.

"It has also been clarified by Petroleum Ministry that marketing margin has to be discussed and settled between seller and buyer of gas in settlement of the terms of the Gas Sales and Purchase Agreement," Sharma wrote.

Quantum of marketing margin is agreed between seller and buyer of gas based on the cost and risks perceived under the PSC.

For KG-D6 gas, RIL had initially proposed USD 0.12 per mmBtu as marketing margin but when customers sought multiple changes to increase RIL's risks and liabilities, the levy was raised to USD 0.15 per mmBtu.

The same was again discussed with buyers in the fertiliser sector (who were given the top most priority to receive KG-D6 gas) and the Department of Fertilisers and finally a marketing margin of USD 0.135 per mmBtu was agreed with the buyers, it added.

Source: ET

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NTPC signs pact with RIL for buying part of K-G D6 gas for $4.20

State-run NTPC, India's biggest power producer, today signed a pact with Mukesh Ambani-led Reliance Industries to buy a part of
natural gas allocated to it from K-G D6 fields at a rate of USD 4.2 per mmBtu. NTPC will buy 0.61 million metric standard cubic meters of gas a day for its plant in Anta in Rajasthan, an industry official said. The gas will start flowing in the next 7-10 days, the official added.

The volumes are less than one-fourth of the 2.67 mmscmd gas the Government had allocated to NTPC.

The state-run power utility signed a Gas Sales and Purchase Agreement (GSPA) with RIL and a separate Gas Transportation Agreement with Reliance Gas Transportation Infrastructure Ltd.

The government had last year allocated 2.67 million cubic metres per day of K-G D6 gas to NTPC's Kawas and Gandhar in Gujarat and Anta power plants in Rajasthan

NTPC does not want to take RIL gas for Kawas and Gandhar plants because of the pending legal dispute over supply of gas at USD 2.34 per mmBtu price quoted by RIL in a 2004 tender. "Against an allocation of 2.67 mmscmd, GSPA for only 0.61 mmscmd of gas for Anta unit will be signed for now," he said.

"Government will have to take a call on reallocating the remaining gas to NTPC's other plants."

NTPC, which unlike the 40-odd other customers of K-G D6 gas was initially opposed to paying USD 0.135 per mmBtu marketing margin to RIL, has agreed to pay the levy.

RIL can produce over 60 mmscmd of gas from K-G D6 fields but is restricting output to 37 mmscmd in the absence of offtake from existing customers like NTPC and failure of the government to name consumers beyond the initial 40 mmscmd.
Source: http://economictimes.indiatimes.com
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RIL speaks out on the gas war

This is KG-D6, the deepwater block in the Bay of Bengal, which has the potential of reducing India’s fuel import bill by 20% or Rs 55,000 crore. Seven years ago, in 2002, Reliance made the largest gas discovery here. This gas field can produce 550,000 barrels of oil equivalent or nearly 40% of India’s current oil and gas production. Spread across 330 square kilometres, the reservoir of KG-D6 is located 2 kilometres below seabed, which is another 1.2 kilometres below sea-level, far too deep for humans to access.
So, almost straight out of a sci-fi movie, high precision operations are carried out by robots. A single mistake, as simple as that of a screw or a valve being ill-fitted, can result in a loss of billions of dollars. While Reliance has won kudos from the world’s E&P industry, the commissioning production in six and a half years from the time of discovery versus the average of nine years and at a cost that is the third lowest in the world.

Not too many people know, this platform was actually preassembled in Morgan City in Louisiana and Dubai before being installed here. With no in-house expertise, Reliance had to go in search of global talent. Soon 200 consultants from 12 locations around the world were on board for engineering, procurement and construction. Almost 18,000 expats have worked at the KG-D6. None of this comes cheap. Neither do the 85 marine construction vessels, and 4 deepwater rigs that were deployed by Reliance.

For instance, this rig costs USD 1 million a day and USD 1 billion over five years. Reliance says it realised the capex would have to be hiked and that too at a time when commodity prices were spiralling. Anil Ambani has publicly questioned Reliance’s capex claims and has even asked the Prime Minister’s Office to order an audit by the Comptroller and Auditor General of India or the CAG.

So, as I make my way to the floating production storage oil vessel where oil is collected before being shipped out, I talked to PMS Prasad about the charge of inflating the capex.

Prasad: Our drilling costs have gone up by 300-400%. But that’s not the only thing, even the engineering services costs, per man hour costs have gone up USD 100-200 or even more. So the engineering man hours and some of the installation crew, we pay them USD 2,000 to 2,500 a day and this was not the kind of rates that were being paid in 2003-04 that is simply because the world didn’t have enough experienced people to do this kind of work. So people were scarce and we had to attract them to come here by incentivising them and by paying higher salaries.
In addition, all the installation vessels, there are very few installation contractors in the world of the quality that we needed and we have employed some of the best. On this field we had Allseas, we had Technip, we had Helix. These are some of the best installation contractors in the world. Technip is from France, Allseas is from Netherlands and Helix is from the US, and to get them to work here and considering the weather vagaries and the downtime that we have had because of the weather.

Q: Didn’t you factor all that in 2003?
A: We didn’t know much about this in 2003 and unfortunately just one year after the discovery we didn’t know much and we could not foresee a kind of increase that was going to happen. In 2003, we thought drilling rig and services per day would cost maybe USD 225,000 to USD 250,000 a day. But in reality when we ended up paying a million dollars a day, we were shocked. The same thing the peak of the commodity cycle that happened between 2005 and 2008, still prices went up and everything went up, steel prices, installation expert costs, engineering costs, installation spread costs and the fact that the steel costs went up by about 100%. So, we were kind of caught in this upward spiral.
So, the costs were not under our control and I think this was a universal phenomenon. Why only talk about Reliance. Look at the other comparable field costs. Everybody had to go through the same price spiral. But even today, though the commodity prices have somewhat softened, but the services cost we still pay USD 1 million a day for drilling rates. They have not come down.

Q: You made the largest gas discovery back in 2002. You have constructed this engineering marvel. But do you think that since the commissioning, how do you feel about the fact that it has been a little hijacked by the entire controversy? Has that overshadowed the engineering marvel?
A: In fact if there is any regret, that is really my regret. We think that we have built a great asset and as you rightly said it is an engineering feat and something that the country and the E&P industry in the country should be proud of. It has added so much value. Unfortunately, it is this avoidable controversy that kind of overtook all the glory and the shine off. I am really unhappy about this because this is not the right level or the right kind of recognition that all the Indian professionals that having worked very hard and created something like this, they don’t get recognised. I am not happy about it, but that is the way life is.
So, I do believe that once the controversy blows over one way or the other that there will be recognition and I am happy that atleast people like you are coming and seeing this. This way atleast there is an opportunity for us to showcase this to a much larger audience who otherwise would not know about this. The fact that we have doubled the production of the gas in the country goes unnoticed because of the media controversy.

Q: So, how much are you producing today?
A: Right now about 36-37 million cubic metres. We had started production on April 1 and we are about 4 months into production. Check any other comparable field start-ups, in four months I am sure they would not have reached the near 50% capacity that we have managed. We are very happy about the smooth ramp-up in production. This is something that speaks for the quality of the engineering and equipment and the installation that has been done.

This is the onshore terminal, built on part of the 200 acres belonging to Reliance. It is here in this giant facility that the gas is separated from its impurities. This is the central control room or the nerve centre of the KG-D6. Since everything is automated, only 250 people are required at any given time to manage all offshore and onshore operations.

Gas production at KG-D6 commenced in April this year. After traveling through all the major facilities I felt the time was right to ask Prasad when production would be ramped up from the current 37 mmscmd to the 80 mmscmd. After all, another allegation made by Anil Ambani is that Reliance is hoarding gas and creating an artificial scarcity.

Q: When are you going to hit that 80?
A: We are ready to produce more than 60 million and we are waiting for the government to give us more linkages to customers. Right now, they have given us linkages up to 40 million. We have signed all agreements with National Thermal Power Corporation (NTPC). We are also almost delivering gas to people except one or two customers like Essar and Gail who will be taking gas probably next week. Dabhol, Ratnagiri Gas and Power Pvt (RGPPL) would start taking gas from October 1. But otherwise we are almost there at 40 million. So, now we are eagerly waiting for the new EGoM to be formed so that the government can give us more linkages.

Q: Is the government giving you a timeframe? Do you lose money if you do not ramp up?
A: We do, a lot. The Rs 35,000-36,000 crore that we have invested is Reliance’s money. It is Reliance’s shareholders money, the money that Reliance borrowed from the banks and if we are not able to earn revenues from these investments, it is a loss of present value.

Q: One of the allegations that you are purposely not ramping up production, you are holding gas, you are artificially creating a scarcity, what are your thoughts on that?
A: I can only laugh because no-one after having invested this much money would want to not produce. For the next five years, the gas price is fixed. So, how does it help me? Secondly, I have to repay my debt, so how does it help me not to get the revenues today. The only reason that we are not able to produce more is because of the procedural delays in forming in new EGoM and then giving us more allocations.

Q: Because of what the government is not being able to fastrack, you are not able to ramp up the capacity?
A: Absolutely. So in a light of view, it is the government which decides to hold the gas not Reliance.

Q: The other thing which has gone against you in the recent few months has been the clarification that has come that now seven year income tax holiday does not stand, what does that mean for you? What kind of a big hit you will take?

A: It is a big hit because in the production sharing contracts and also in other supporting documentation, it is very clearly mentioned that both oil and gas are eligible for tax holiday. We can give a new definition to the mineral oil just for the sake of 80IB and then say, this doesn’t include gas. But I think it is unfair and we have been made a promise based on which we all took so much risk and then put in these big investments and then when the investments are about to fructify, saying that the gas is not entitled to a tax holiday, I think is a bit unfair.

Q: Can you give us a broad range, what could it mean for Reliance Industries?
A: It would be of the order of a couple of billion dollars over seven years, but I need to re-check the numbers. You are a financial channel, so you love to have the numbers but I hate to give out numbers because these are very sensitive information.

Q: But if you don’t get that income tax holiday, would you consider arbitration? What would be the next step?

A: Yes, arbitration is the last resort but right now the government has said that since this matter is subjudice, let the courts decide. So, we will wait for the courts to decide in some of the pending issues. But if that decision doesn’t come through, then we do have to look at other means including arbitration.

Q: Are they inviting you for partnership overseas, for new projects?
A: I can only say that if there is an opportunity it has to be good for both. So I am sure some of them may want to partner us here and equally we may want to partner them but then that is a different discussion. Right now, we are just focusing on getting the production.
Q: Is there anything on the table?

A: I cannot talk about this now. It is not that there is anything on the table. Opportunities do come all the time but then they need to be good for both. What is not good today may be good tomorrow or what was not good yesterday may be good today.

Q: After commissioning the - if you are looking to sell stake in six of your overseas blocks, which I understand is part of the regular farming out of stake and things like that but not looking to expand also at the same time?

A: The upstream industry typically people hold – it is a very rare thing that we have done here holding 90% participating interest. Typically they are all around 30-40-50%. So in our overseas blocks that is what we are trying to do. We are trying to reduce our exposure and be under industry guidelines of around 30-50%. As far as the Indian blocks are concerned, we will look at that opportunity at the right time but at this point of time, we are focusing on stabilizing the operations and increasing the production and the reaching the 60 and maybe some time later 80 million cubic meters.
Q: While you are stabilizing these operations, it also happens to coincide with the first phase of NELP VIII. Does NELP VIII excite you?

A: NELP VIII is a good opportunity but at the same time, I have to look at my portfolio. How much of risk appetite that I have. When you look at a portfolio of all your properties and assets, how many oil explorations, how many discoveries you have that need to go into development and how many producing properties. You need to have a fair balance between the producing properties, between the discoveries that need to be developed and the rank exploration purpose. We already have a lot of exploration properties. So our portfolio today is biased towards exploration, so we need to get more discoveries and discoveries into production.

Q: We might not see you bidding at NELP-VIII?
A: No, not that way. We will selectively in NELP-VII. I am waiting for the assessment from my geoscientists. Once they give their assessment, we will look at it how does this fit into our portfolio in terms of the risk exposure that we are willing to take and then make that decision. But I have never said that we will not bid for NELP-VIII. We will certainly look at the NELP-VIII properties.

http://www.moneycontrol.com/news/business/exclusive-ril-speaks-outthe-gas-war_413881-3.html
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NTPC may sign deal with RIL for natural gas at $4.20/mmBtu

After a series of flip-flops, NTPC is likely to finally sign an agreement with Reliance Industries this week to buy government alloted natural gas at officially approved price of USD 4.20 per mmBtu.

However, the state-run power utility may initially draw less than one-fourth of its allocation.

"NTPC has informed that they have got internal approvals for signing of the Gas Sales and Purchase Agreement (GSPA) and it may be signed in the next couple of days," an Oil Ministry official said after a meeting called to review unsigned GSPAs.

The government had last year allocated 2.67 million cubic metres per day of KG-D6 gas to NTPC's Kawas, Gandhar and Anta power plants in Gujarat, a move that drew huge protests from RIL that wanted the pending legal dispute over gas it had committed in a 2004 tender of the state-run firm was resolved.

NTPC vehemently fought back saying its litigation against RIL was for future expansion projects at Kawas and Gandhar and the present supplies were for present plants.

After the allocation was confirmed, it did a volte-face refusing to take gas for existing Kawas and Gandhar plants.

"Against an allocation of 2.67 mmscmd, GSPA for only 0.61 mmscmd of gas for Anta unit will be signed for now," he said. "Government will have to take a call on reallocating the remaining gas to NTPC's other plants."

NPTC, which unlike the 40-odd customers of KG-D6 gas was initially opposed paying USD 0.135 per mmBtu marketing margin to RIL, has agreed to pay the levy.

The official said of the initial 40 mmscmd of output from RIL's KG-D6 field, NTPC, Dabhol power plant, Essar Power and Oil and Natural Gas Corp (ONGC) are yet to draw a single unit.

RIL can produce over 60 mmscmd of gas from KG-D6 fields but is restricting output to 37 mmscmd in the absence of offtake from existing customers like NTPC and failure of the government to name consumers beyond the initial 40 mmscmd.

At the meeting today, Ratnagiri Gas and Power Pvt Ltd -- the firm that runs the 2,150-MW Dabhol power plant in Maharashtra -- informed that it will begin drawing 5.67 mmscmd gas from October 1, the official said.

ONGC, which had been allocated 0.4 mmscmd for its LPG extraction plants, was likely to sign GSPA by mid-October as it was yet to arrange for a suitable swap, he said.

KG-D6 gas is lean (only methane) and cannot be used to extract LPG. So this gas will have to be swapped with some users who are currently using rich-gas from western offshore.

The government had allocated 3 mmscmd of KG-D6 gas for LPG plants, and of this state gas utility GAIL has taken 2.59 mmscmd.

Essar Power was negotiating a gas transportation agreement for taking KG-D6 gas at its Hazira plant in Gujarat.

Source: Economic times

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RIL on its KG-D6 capex increase

PMS Prasad counters the allegations made by the Anil Dhirubhai Ambani Group (ADAG) and clarifies RIL’s stand. Prasad countering ADAG’s allegation, said that the capex had not been inflated.

Explaining the reasons behind the fourfold increase from USD 2.47 billion in 2003 to USD 8 billion, he said, “The drilling costs have gone up by 300-400% but that’s not the only thing. Even the engineering services costs per man, has gone up to USD 150-200 or more. So we pay USD 2,000 to 2,500 a day to some of the installation crew. This is not the kind of rates that were being paid in 2003-04. That is simply because the world didn’t have enough experienced people to do this kind of work. And we had to attract them to come here by incentivising them and by paying higher salaries.”

“In addition, all the installation vessels, there are very few installation contractors in the world of the quality that we needed and we have employed some of the best installation contractors of the world from France, Netherlands and from the US and to get them to work here and considering the weather and the downtime that we have had because of the weather,” he added.

Source: Money control

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No justification for NTPC’s Rs 32K cr savings talk: RIL

The gas battle continues to rage. Reliance has reacted to National Thermal Power Corporation’s (NTPC) charge that NTPC will save Rs 32,000 crore if Mukesh Ambani led Reliance Industries Ltd (RIL) delivers gas at USD 2.34 per mmbtu. RIL’s sources have very categorically said that there is no justification for NTPC to talk about the savings of Rs 32,000 crore when it is buying gas at USD 11 per mmbtu when it can get gas at USD 4.2 per mmbtu from RIL’s KG D6 basin.

The war of words continues for Reliance. This time it is against NTPC which came out with a statement that it stands to gain or save Rs 32,000 crore. RIL’s sources have very categorically said that there is no justification for NTPC to talk about the savings of Rs 32,000 crore when it is buying gas at USD 11 per mmbtu when it can get gas at USD 4.2 per mmbtu from RIL’s KG D6 basin.

It says that RIL has agreed to sign gas sales and purchase agreement (GSPA) without prejudice to the court case which is in Bombay High Court (HC) but NTPC has refused to sign the GSPA despite the fact that RIL has given an written undertaking that it will be without prejudice to the case.

It also says that USD 2.34 per mmbtu is subjudice and NTPC cannot be asking for gas at that price. It says that NTPC went to court without signing any agreement and so this price is subject to the final settlement in the Bombay High Court. It says that this price of USD 2.34 per mmbtu is also subject to the government approval because that is as per the Production Sharing Contract (PSC) which RIL has to follow because of the agreement which it has with the government of India.

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Natural Gas/Lower price: RIL/RNRL/NTPC

Lower price will hurt gas industry: Bernsstein Research

India cannot afford to let lower natural gas price of $2.34 per mmBtu prevail as the rate will hinder development of a natural gas industry in the country, US-based Bernstein Research said in a latest report.

Today, India has among the lowest prices of natural gas in Asia. This may suit consumers who are fortunate enough to have supply, but does not reflect the scarcity of natural gas resources," the investment research firm said in its report dated September 11.
In its report titled 'Blood Brothers - There Can Only Be One Answer', Bernstein talked of the gas dispute between the Ambani brothers wherein younger Anil's Reliance Natural Resources Ltd is claiming gas from Mukesh's Reliance Industries at $2.34 per mmBtu, rates which are 44 per cent lower than the government price of $4.20 per mmBtu.
"Step aside Russia and Ukraine - this time it's serious! Its hard to recall a spat in the world of gas which has been as contentious and caught the public eye as much as the one between the Ambani brothers relating to the supply of gas from the giant Dhirubhai gas field in the KG basin," it said.
Endorsing RIL's KG-D6 field cost of $8.8 billion as "one of the lowest cost deepwater gas fields in the world", Bernstein said, "if the lower gas price of $2.34 per mmBtu is approved and applied to all gas produced from Dhirubhai, we estimate the full cycle IRR would be less than 3.3 per cent, which is below the cost of capital."

"The lower gas price (of $2.34 per mmBtu) calls into question the whole viability of the development of deepwater gas in India becuase of the precedent it sets," Bernstein said.
RIL's gas finding and development plus operating costs comes to "extremely competive" $10 per barrel. "Does this mean RIL will make exorbitant profits? The answer is no."
It said the full-cycle IRR on Dhirubhai assuming a gas price of $4.2 per mmBtu, was close to 25 per cent. "By comparision with other provinces, this is at the lower end of what would be expected for a deep water development and certainly commensurate with the exploration risk and technical challenges of the project."
Bernstein said India has one of the lowest prices of natural gas in Asia.
While state-run Oil and Natural Gas Corp (ONGC) sells gas at $2 per mmBtu, neighbouring China has doubled the rates to $4 per mmBtu in past 10 years.
"Rather than helping, low gas prices are hindering the development of a natural gas industry in India," it said.
"Given that deepwater gas supply would be the key to meeting domestic demand growth in India, any disruption to investment in the exploration and developmnet of the KG basin will slow down the supply of natural gas and increase India's demand for expensive imported crude oil and LNG," it added.
Bernstein said RIL would lose over $14 billion in revenue over a 15 year period if the lower price of $2.34 per mmBtu was to prevail.
"Moreover it will set lower expectations in the minds of other consumers on future gas prices and continue to dissuade international E&P majors from participating in India's gas boom," it said.
In five years, $4.2 per mmBtu rates would be cheap. "Although RNRL are right to seek the best price possible, we believe they should lock in as much natural gas at this price as they can and focus on developing their gas fired power business which is where the long term value lies," it said.
The research firm said the only regions with lower gas prices than India are Russia and the Middle East where domestic gas prices were between $1-2 per mmBtu. "Unlike India, these countries also have abundant gas reserves."
In case of Russia, state-run Gazprom has been forced to use profits from its gas export business to Europe to subsidise the loss making domestic gas supply. In the Middle East, low gas prices had also led to a lack of investment in regional gas exploration and promoted countries with abundant gas reserves to export gas as higher priced LNG rather than supplying regional markets, it said.
"The impact of this has been seen in gas shortages and power outages across Kuwait, UAE and Oman."

Source: business-standard.com
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RIL's gas output may be 4 times the estimate

Will reduce the country’s dependence on imported gas

The D-6 fields of Reliance Industries in the Krishna-Godavari (KG) Basin have the potential to produce gas that is over four times the estimated peak output of 80 million cubic metres a day (mmscmd).

VK Sibal, director general, directorate-general of hydrocarbons, told Business Standard, "The 50 wells in D-6 were earlier estimated to produce a total of 80 mmscmd gas (at the rate of 1.6 mmscmd per well). However, each well can produce about 6 to 7 mmscmd, so you can estimate the potential.” Sibal said that the government was usually conservative in approving the proven reserves as the exact potential could be ascertained only after actual production starts.

Sibal had said earlier that 18 wells had been drilled in the D-1 and D-3 gas fields in the D-6 block, but only eight had been opened, while testing was going on at two wells.
Reliance Industries has already stepped up gas production from 28 mmscmd in June to about 36-37 mmscmd now. The production will soon reach 42 mmscmd once the supply to the Dabhol power plant is increased in the first week of October, said a company official.
The Karnataka government has recently written to the Centre seeking 40-45 mmscmd of natural gas for industry in the state.

The two gas discoveries (Dhirubhai-1 and -3) and one oil discovery (in Dhirubhai-26) are amongst the 19 discoveries (18 gas and one oil) announced so far by Reliance Industries in its D6 KG basin block off the Andhra coast.

Reliance owns 90 percent in the venture, while Niko Resources of Canada holds the remainder. In the east coast, about six to seven belts are rich in gas and oil. So far, India has drilled about 0.16 wells per 1,000 sq km, which is very less as compared to 50-60 wells per 1,000 km in West Asia.

The demand for oil and gas is rising 30 per cent per annum. “We are importing about 95 to 96 per cent of our demand. The commencement of production by Cairn Energy will cater to 25 per cent of the demand,” Sibal later told reporters in Gandhinagar on Saturday.
Asked if the Ambani feud will impact NELP VIII, he said that any corporate feud will have a negative impact anywhere in the world. Infact, "The lower gas price (of $2.34 per mmBtu) calls into question the whole viability of the development of deepwater gas in India becuase of the precedent it sets," according to Bernstein report.

Source: business-standard.com
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RIL to lose $14 bn on lower KG-D6 gas price

The stakes in the Ambani gas dispute are high for both parties and the outcome uncertain. If the lower price prevails RIL stands to lose over $14 billion in revenue (over a 15 year period) and the government valuable taxation revenue. Moreover, it will set lower expectations in the minds of other consumers on future gas prices and continue to dissuade international E&P majors from participating in India's gas boom.

According to the Bernstein Research report, the gas price dispute has certainly weighed on RIL which has underperformed the Sensex over the past three months, while Anil Ambani has conducted a very public campaign on this issue. The next milestone in the saga will be the Apex court hearing which is scheduled to begin on October 20.

Investors should watch developments closely over the coming month as a negative outcome has the potential to be damaging to RIL (although given RNRL has yet to build its power plants - the effects will not be seen until 2013). The report says, “We believe that a higher gas price outcome will prevail given the importance to India's emerging gas industry.

In five years' time, we believe $4.20 per million British thermal unit (mmbtu) will be cheap. Although RNRL are right to seek the best price possible, we believe they should lock in as much natural gas at this price as they can and focus on developing their gas fired power business which is where the long term value lies.” If the lower gas price of $2.34 per mmbtu is approved and applied to all gas produced from Dhirubhai, the report estimates the full cycle IRR would be less than 3.3% which is below the cost of capital. In other words, the lower gas price calls into question the whole viability of the development of deepwater gas in India because of the precedent it sets. If Dhirubhai cannot be developed economically, what chance do the other smaller discoveries have of making progress?

The report notes, although the legal arguments are complex, our view on this issue is simple.India cannot afford to let the lower gas price prevail, if it is serious about developing its natural gas industry. India needs natural gas.

At present, natural gas represents only a fraction of the energy mix in India at around 5% of total energy consumed. This is low by international standards. Natural gas in developed countries typically occupies 20% to 30% of the energy mix. The low penetration of gas in the energy mix is partly a function of the low levels of GDP per capita (which is highly correlated with gas consumption) but also due to a shortage of domestic gas supply.

Moreover, today, India has among the lowest prices of natural gas in Asia. This may suit consumers who are fortunate enough to have supply, but does not reflect the scarcity of natural gas resources. Rather than helping, low gas prices are hindering the development of a natural gas industry in India.

ONGC provides gas for a price of $2 per mmbtu under the adjusted pricing mechanism (APM) which is hardly an incentive to go exploring for gas. Lessons from other countries which follow or encourage low natural gas pricing policies are not encouraging.

The only regions with lower gas prices than India are Russia and the Middle East where domestic gas prices are between $1-$2 per mmbtu. Unlike India, these countries also have abundant gas reserves. What is clear, however, is that in both countries the policy of low gas prices has had a negative impact on the development of natural gas....

Source: financialexpress.com

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KG D6 Savings

During the first round of NELP in 1999, the 7,645 square-km KG-DWN 98/3 block, also referred as KG D-6, was awarded to a consortium of Reliance Industries (RIL) and its Canada-based partner Niko Resources. RIL is operator in the block with 90% stake in the field while Nikko is the minority stakeholder with remaining 10%. The consortium was granted mining lease for 20 years.

RIL made its famous gas discovery in KG-DWN 98/3 block in the year 2002, which was also the largest gas discovery of that year globally.

Investment:

Total project cost is estimated at $9.5 billion over the life of the field in two phases. RIL has made an investment of $5.2 billion during the first phase of the development plan of D-6 block. In the second phase, the company proposes to make an investment of $4.3 billion through the life of field to sustain the plateau production i.e 1 tcf per annum.

Government shares from KG D6 basin at $2.34 and $ 4.2/mmbtu

At $4.2/mmbtu, DGH estimates Government take would be around $16.1 billion over the ten-year life of the field, which includes $2.0 billion in the form of Royalty, $9.1 billion Profit Petroleum and $5.5 billion in the form of income tax.

At $2.34/mmbtu, DGH estimates that Government take would be around $4.9 billion over the ten-year life of the field, which includes $1.1billion in the form of Royalty, $1.0 billion Profit Petroleum and $2.8 billion in the form of income tax.

Outcome

• The Government's share of profit petroleum varies from 10% to 85% which primarily depends on the profitability from the block. Higher profitability leads to higher share to the Government. Hence, at gas price of $4.2/mmbtu, the average share of profit petroleum to the Government works out to 35% over the life of the field, while at gas price of $2.34/mmbtu, this share drops to 11%.

• Government is expected to cumulatively make USD$ 16.5 bn at $4.2/mmbtu while at 2.3/mmbtu it is expected to make just $USD 4.9 bn which is nearly 228% less ( Royalty+Tax+Profit Petroleum)

source:DGH
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RIL says has lost $400 mn due to delay in gas use

Mukesh Ambani-led Reliance Industries Ltd (RIL) says it has suffered a $400 million (Rs 1,960 crore) revenue loss since May this year and continues to take a hit of $100 million (Rs 490 crore) per month by keeping the gas production from its D6 gas block in the Krishna-Godavari basin lower than its potential.

RIL needs government approval to sell its gas. The company, whose fortunes are tied to the government's gas use policy, currently has the potential to produce over 60 million standard cubic meters of gas per day (mmscmd) from its KG-D6 gas block but is producing 36 mmscmd. Government has allocated 40 mmscmd to key sectors like power, fertilisers and steel.

We have been suffering a lack of demand since May and at present, we are producing 60 per cent of what we can produce from the block," RIL's executive director P.M.S. Prasad, who was recently appointed to the company's board, told Hindustan Times.


Analysts say that the government may be dragging its feet on account of RIL's court dispute with Anil Ambani's Reliance Reliance Natural Resources Ltd and public sector NTPC over the supply of 40 mmscmd of gas.

Prasad said the interest burden was mounting. "We had a certain schedule for repayment of debt, which will now get deferred and we will have to pay $17-18 million per month higher as interest cost," he said.

RIL's internal target is to reach 80 mmscmd by December, but it could stretch to March or beyond on account of uncertainties, he said.

Reliance Industries claims that it already has 25 to 30 customers from that are ready to buy up to 82 mmscmd gas. It also has an internal demand for 17 mmscmd.
Source:http://www.tmcnet.com
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More gas needed to revive sick fertilizer plants

Fertilizer secretary Atul Chaturvedi said in an interview that additional gas was needed for the expansion and conversion of so-called brownfield projects, which involve addition of capacity at existing units. He added that 15.4 million standard cu. m per day (mscmd) of gas was needed for seven sick units. Edited excerpts:

You said that the sector needs additional 43.4 mscmd of gas. Can you take us through what that is required for?

We have said earlier also that we need gas for our expansion projects, conversion and also brownfield projects which we are in the process of reviving and the starting point of all these initiatives is the availability of feedstock, that is gas. So we have some projects which have already been identified which are going through conversion from fuel oil and naptha to gas. We have got some already existing plants which are contemplating expansion for which they need commitment of gas and we have got about six-seven erstwhile Fertilizer Corp. of India Ltd and Hindustan Fertilizer Corp. Ltd plants which we are contemplating to revive in near future. One of the essentials is to have the commitment for gas and the total gas requirement according to our estimates is around say 40 mscmd for all these initiatives and we have to get it from somewhere because that is a precondition for financial closure.

Specifically for reviving the closed plants, how much additional gas is required?

As a ballpark figure, each plant needs about 2.2 mscmd of gas (15.4 for seven).

From where will this 40 mscmd come?

We are in discussions with GAIL and the petroleum ministry. We were earlier allotted gas for standard assets and now that part is over. Now, we need either a long-term commitment from GAIL, which ...can procure it from international markets, or from other sources, or we can get (it) if gas is available from (Reliance Industries Ltd) KG D6 (gas fields)...

With respect to the KG -D6, I believe you have also requested a transportation tariff plan or policy. What exactly is your difference with what the policy indicates right now?

It is not with reference to KG D6 transportation. What we need is a total clarity on the transportation tariffs because the way it has been explained to us, the cost of transportation of gas to eastern part of India, say in Bihar or West Bengal or Jharkhand or Orissa, would be extremely high. We now have to take a call whether it is cheaper to transport gas or cheaper to transport fertilizer. Since these are large consumption areas and they had earlier fertilizer plants, what we need is a clear predictable policy...earlier it was only GAIL, which was the single supplier, and now with more players joining in and more pipelines coming in the future, I think we need a...more predictable transportation policy...

source: livemint.com
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RIL has strategic partners for oil blocks

For good blocks we have partners

On the change in strategy for future bidding under NELP
Perhaps we went too fast in completing KG-D6, unlike other multinational companies. We have realised that it is better to have stakes along with other joint venture partners to be at peace than to take huge risk and feel helpless at the end. So under NELP-VIII, if we can identify good blocks, we will go in partnerships and may not stress for the role of an operator.

On potential partners

We have been in talks with various companies. If there are good blocks, we are ready with partners.

On new greenfield projects

We are waiting for the new fertiliser policy and are very keen to set up a gas-based fertiliser plant. Whether it will on KG-D6 gas or any other gas or even in India are decisions we still need to firm up. But yes it will be a large scale project.

On overseas asset acquisition strategy

Now we have come off an asset building program and already have a number of exploration blocks in various countries. In order to balance our portfolio, we are looking at discovered assets which would go into production and need capital. Producing assets are something we are always looking at but those available are more of gas than oil. We are looking at the rights assets.

On countries on the radar

We are looking at a decent sized oil and gas assets in North and South America besides scouting for opportunities in Canada. Gulf of Mexico and Brazil have been on our radar for long
Source: Hindustan times
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No marketing margin on gas approved: ministry

The petroleum ministry has informed the power ministry that no marketing margin was approved for sale of gas by companies like Reliance Industries, saying these are commercial arrangements between sellers and buyers. The oil ministry made this position clear in response to a clarification sought by the power ministry on marketing margin charged by RIL for sale of gas from its K-G basin fields on top of the price of $4.20 per mmBtu. "It is informed that the government has not, till date, fixed or approved the quantum of marketing margin for sale of natural gas by any contractor," it wrote on August 11.

RIL is charging a marketing margin of $0.135 per million British thermal unit on the gas from KG-D6 fields. While Anil Ambani Group's RNRL had on Sunday alleged that RIL was charging "unauthorised" marketing margin, 35 firms buying KG-D6 gas are paying the $0.135 per mmBtu to RIL without protest.

Source:
www.financialexpress.com
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Reliance Losing $100 Million in Gas Sales a Month Amid Lawsuit

Reliance Industries Ltd., India’s most valuable company, said it is losing $100 million of sales a month from the nation’s biggest gas field because of a government delay in allocating buyers for the fuel.

Reliance has been producing 60 percent of the 60 million cubic meters daily capacity in the KG-D6 field since May, P.M.S. Prasad, president of the company’s oil and gas business, told reporters yesterday at the field in the Bay of Bengal. Reliance needs government approval to sell the gas.

The company, controlled by the world’s seventh-richest man Mukesh Ambani, is fighting a lawsuit over output from the field with Mukesh’s estranged younger brother Anil Ambani. Reliance’s earnings may be affected by the limited output as the government awaits a resolution of the suit before naming additional buyers, said Deepak Pareek, a Mumbai-based analyst with Angel Broking Ltd.

“The government may be going slow on allocating additional gas because half of the peak output is under litigation,” Pareek said. “Reliance’s estimated earnings may be hit for a quarter and it could be longer till the court decides in its favor.”

Reliance shares fell 0.3 percent to 2,140.85 rupees at the end of trading in Mumbai on Sept. 11. The stock has gained 74 percent this year, giving the company a market value of $69.5 billion. The key Sensitive Index of the Bombay Stock Exchange has risen 69 percent since January.

Cost of Debt

The cost of paying interest on 280 billion rupees ($5.7 billion) of debt raised to develop the field is increasing because Reliance is unable to repay the borrowings as rapidly as it would like and cut interest costs, Prasad said.

“We would’ve liked to repay the loans quicker,” he said. “We can’t and that is increasing our interest costs. We will service the debt, not default on it.”

Through the 11-year life of the field, Reliance aims to invest $8.8 billion, of which it has spent about $5.8 billion, Prasad said. Beside the debt raised from local and overseas lenders, Reliance will use its own money, he said.

The KG-D6 field may hold as much as 9.2 trillion cubic feet of gas, according to Reliance’s partner Niko Resources Ltd., based in Calgary, Canada.

The government designated fertilizer and power producers as priority customers for the fuel from the field. India’s Oil Minister Murli Deora said on Aug. 31 he asked the prime minister to form a new panel of ministers that will decide the additional allocation of natural gas from the KG-D6 field, following national elections in May.

“We hadn’t expected we’d be held up from producing,” Prasad said. Reliance is also buying liquefied natural gas for its own needs because the company hasn’t been allotted any gas from the field, he said.

Reliance is producing just 37 million cubic meters from the gas field, Prasad said yesterday.

Price Accord

Anil is trying to enforce a 2005 agreement requiring Reliance to sell natural gas from the field off the country’s east coast to his Reliance Natural Resources Ltd. at 44 percent less than the price set by the Indian government.

The accord also distributes all future gas from the KG-D6 basin between the brothers, with Reliance Industries getting 60 percent of the fuel, according to Oil Secretary R.S. Pandey. The agreement between the brothers requires Reliance Industries to sell 28 million cubic meters of gas per day at $2.34 per million British thermal units for 17 years to Reliance Natural.

Reliance Industries has said gas from the field in the Krishna Godavari basin can’t be sold at less than the $4.20 per million Btu set in 2007 by the government, which controls prices of the fuel.

Pipeline Constraints

Efforts to reach peak production of 80 million cubic meters may also be deferred to April next year because of pipeline constraints, Prasad said yesterday. The company aims to drill wells in six months in locations such as Oman, Kurdistan and East Timor, he said, adding it may take five years for Reliance to recover its expenditure on the KG-D6 field.

Production at the KG-D6 field, which started in April, may increase India’s oil and gas output by 44 percent and help save 10 percent of the country’s oil import bill. The development of areas in the Bay of Bengal will offset shrinking supplies from ageing domestic fields that force fertilizer-makers and power producers to use more expensive naphtha and imported gas.

Reliance currently produces 12,000 barrels of crude daily from the field and plans to raise output to as much as 30,000 barrels a day by December, Prasad said. It also plans to produce as much as 9 million cubic meters a day of gas from the area.

India is betting that gas output from the KG-D6 field will help attract investors for its biggest auction of 70 exploration blocks, for which bids close Oct. 20.

Source:http://www.bloomberg.com/

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RIL’s interest burden to rise due to cap on KGD6 gas output

Government needs to allocate additional volumes of gas.

Reliance Industries Ltd (RIL) has said that the company’s interest burden on repayment of loans of about Rs 28,000 crore taken to develop its prolific Krishna Godavari Basin D6 block will increase due to lower output from the field.

RIL is producing below its potential from the fields, as the Government is yet to identify additional customers to take D6 gas. The company’s revenue from gas sales will get delayed due to cap on its production.

Mr P.M.S. Prasad, Executive Director, RIL, said, “At present, we are producing around 60 per cent of what we can produce from D6. So there is a lag in revenues, which is around $100 million per month. The deferred revenue on account of lower production will also increase the company’s interest burden. We had a certain schedule for repayment of debt, which will now get deferred and I will have to pay $17–18 million per month higher as interest cost.”

Currently, RIL, which has a potential to produce more than 60 mscmd today, is producing about 37 mscmd from the fields. At peak the production from the fields is projected at 80 mscmd.

Customers from priority sectors have been identified by the Government for the initial output of 40 mscmd from the fields. For RIL to ramp-up its production the Government needs to allocate additional volumes of gas.

The delay in additional allocation is likely to push back peak production of 80 mscmd from the fields by at least three months. “Our internal target was to reach 80 mscmd by December. Now, if we start ramp-up, it may not be December. It can be March (delay by a quarter),” he said.

The ongoing legal disputes for gas supplies which RIL is involved in – one with Anil Ambani Group company and another with public sector power utility company NTPC – is being seen as a reason for delay in allocation of further gas by the experts.

On demand for D6 gas at $ 4.2/mBtu (landfall point), Mr Prasad said, “Today, we have request for supplying about 85 mscmd, out of which 82 mscmd are capable of immediate offtake.”

As regards ramping up crude oil production from MA fields in the D6 block, he said, “We are hoping to reach 25,000-30,000 barrels by the end of the year.” Currently, the company is producing the crude oil from three wells, which it plans to take up to eight.

RIL is investing $2.23 billion in developing the oil fields, which also have a potential to produce around 9 mscmd of associated gas. “Gas production from MA fields will be corresponding to oil production reaching its peak.”

Source: HBL

For further information, please visit:

http://oilandgasindia.blogspot.com/

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RIL asks govt for additional allocations

Reliance Industries Ltd (RIL) has again asked the government to make additional gas allocations from its D6 block to new customers like captive power plants in order to help it ramp up production, which is currently constrained by a lower offtake.

“KG-D6 currently has a capacity to produce more than 60 million metric standard cubic metre a day (mmscmd) and this will increase to 80 mmscmd shortly… We once again request you to make additional allocations to these customers, which will enable us to increase production,” RIL President (gas business) R P Sharma said in a letter to the petroleum ministry.

RIL said there are several captive power plants already connected to the pipeline network, which can consume 8-10 mmscmd gas. A letter dated September 8 also requested the government to extend the contracting priority for supply of D6 gas to power sector customers to five years and at 90 percent plant load factor from the current 60-70 per cent due to increased gas availability.

It also asked for conversion of 11 mmscmd gas to power plants under firm allocations from the current fallback arrangement. As per the gas utilisation policy, the government has allocated 15.1 mmscmd to fertiliser plants, 3 mmscmd to the liquefied petroleum gas extraction plants, 18 mmscmd to power sector, 0.83 mmscmd to city gas distribution projects and 3.75 mmscmd to steel plants.
Source:B.S
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What Price, Gas?

If Mukesh Ambani loses, more lawsuits will follow. And everyone will lose, especially the people of India.

If Anil wins, the government’s power, fertiliser and city supply plans could be starved of gas.

t’s a national resource that is in danger of being cornered by two individuals—at the expense of the nation. The Ambani brothers are squabbling over the quantity and price at which Mukesh is supposed to supply gas from Reliance Industries’ (RIL’s) D-6 field in the K-G Basin to Anil. The focus of that battle has now shifted to the Supreme Court with RIL filing a writ petition on july4. But the contentious agreement between them also contains clauses that effectively divide the entire gas between the brothers. If that happens, it will make a mockery of a government policy that earmarked about half of the D-6 gas for other players and projects of national importance.

At full capacity, Reliance Industries’ daily output from the K-G basin will be 80 mmscmd (million metric standard cubic metres per day). The government’s gas utilisation policy of 2007 had promised to provide 15 mmscmd of this D-6 gas to fertiliser plants, 18 mmscmd to power plants, and 5 mmscmd for city gas distribution, and 2 mmscmd for LPG. However, a Bombay High Court decision gives the memorandum of understanding (MoU) signed by the Ambanis in 2005 precedence over the production-sharing contract between RIL and the government. The ruling, if upheld, threatens to take away the government’s legitimate right over its natural resources.

If the MoU is honoured, Anil’s Reliance Natural Resources could walk away with 28 mmscmd of gas. It will get an additional 12 mmscmd if NTPC is not able to reach an understanding with RIL. That’s 40 mmscmd. And, it will get it at $2.34, well below the market rate of $4.20.

RIL, in turn, is entitled to 25 mmscmd for captive use. The remaining 15 mmscmd would be divided among the two brothers in a 60:40 ratio, with RIL getting the larger share. Nothing will be left for the government.

RIL has signed contracts with fertiliser, power and steel companies, and begun supplying them the D-6 gas. The worry is that the MoU will put an end to this supply, forcing the plants to go back to more expensive liquid fuels such as naphtha and high-speed diesel. In turn, this would require higher subsidies and widen the budget deficit. Further, a recent Citigroup report points out: “If the issue lingers, it could discourage the emergence of demand from new power and fertiliser plants.’’

Ultimately, this could snowball into a massive legal battle. On June 24, Fertiliser Secretary Atul Chaturvedi sent a note to RS Pandey, his counterpart in the Petroleum Ministry. It stated: “If the rights of fertiliser companies are altered to their disadvantage, then the Fertiliser Association of India will be forced to seek legal remedies independently.’’ It is only a matter of time before the power and steel sectors join the raging battle.
Worse, the High Court order will hit the government hard financially. Total recoverable reserves from the D-6 field have been put at 11 trillion cubic feet (as calculated by the Directorate General of Hydrocarbons). The total revenue generated from these reserves at $4.2 per mmbtu will amount to $47.17 billion. The government’s share of these revenues will amount to $19.68 billion in the initial 15 years. But, if 40 mmscmd is sold to Anil at $2.34 per mmbtu, while the rest is sold at $4.2 per mmbtu, the government will get $10.72 billion—about $9 billion less. The biggest losers, of course, will be the people of India.
Source: Business Outlook
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Private disputes over national property

The most significant aspect of the recent Bombay High Court ruling on the sharing of gas from the KG basin between RIL and Reliance Natural Resources Ltd (RNRL) is that the judges completely refrained from making any value judgement on the government’s formal claim before the court that “the Appellant and Respondent cannot settle between themselves how gas, which is a national asset, to be utilised for the welfare of the nation, is to be distributed...”

The high court merely examined the legal validity of the memorandum of understanding (MoU) between Mukesh Ambani and Anil Ambani on how gas from the KG basin is to be shared between RIL and RNRL as per the family settlement. It could be argued that the court’s mandate was limited to examining the MoU arising from the family settlement after the group assets were allocated to the two brothers under their mother’s guidance.

However, common sense would tell anyone that the bigger question which perhaps the court deliberately did not go into was one of whether a national and sovereign resource can be a subject of a commercial agreement between two private parties.

If one were to resort to some exaggeration, it is a bit like two men deciding to share the ownership of Taj Mahal in Agra and then they go to court to determine the validity of the price at which parts of the Taj will be sold by one to another!

Now, even if the high court did not go into the paramount question of whether the Ambani brothers have the unmitigated right, through a private agreement, to share a substantial portion of gas from the Krishna-Godavari basin, the government will soon have to publicly take a call on this aspect of the controversy. This has serious implications for the credibility of the UPA government. The President’s address to Parliament has clearly outlined strong governance as a major plank on which the UPA promises to run this country for the next five years.

How the government, through a strong and credible policy and regulatory framework, deals with national resources such as gas, spectrum, iron ore, coal, etc., is something the people of this country will watch carefully.

Coming back to the KG basin gas controversy, it is useful to recall what the government has formally stated before the Bombay High Court. The court order records all the claims made by the government.

In respect of the gas from the KG basin, the government has said: “It is not the property of the Appellant or Respondent and any understanding arrived at between them is not binding on the government of India. The gas has to be distributed in terms of the EgoM approved gas utilisation policy.”

Summing up the government’s stand in the court, the additional solicitor general stated in no uncertain terms that:

a) The government of India continues to be the owner of the gas till the delivery point;

b) The gas is to be produced and utilised in terms of the gas utilisation policy;

c) The government has a dominant role in the matter of approval of gas prices; and

d) By private negotiations, no party can decide how the natural resources which are national assets are to be dealt with.

Since none of these strong assertions by the government was treated by the Bombay High Court as relevant to the dispute between RIL and RNRL, the UPA government will be left with no choice but to assert its sovereign claim over the gas resources in the KG basin. Clearly, the high court chose not to go into the more difficult question of whether the RIL and RNRL had the unmitigated right, through a private agreement, to share gas from the KG basin in a 60:40 ratio at all.

Getting into the nitty-gritty of various agreements and their contestation in the court of law would be missing the wood for the trees. The real issue, and a legal-constitutional one at that, is — Can the government afford to compromise its publicly declared stand that private parties cannot settle among themselves the basic rights over a sovereign asset?

The whole commercial dispute over the sharing of Krishna Godavari gas is clearly assuming a new dimension. In his own typically muted manner, Union petroleum minister Murli Deora has said the government will fully defend its rights over national assets. The government is currently watching how the one-month period given by the courts to RIL and RNRL to arrive at a compromise over the pricing of gas unfolds. As one said earlier, the issue has now gone beyond pricing and other legal-technical issues.

The state may have to challenge the very basis of an MoU which cosily divides up large portions of national property among two entities. The government has already made its stand very clear in the high court. This stand will have to be reiterated even more strongly in the Supreme Court, as and when an appeal is made there. An ordinance can always be the last resort.
Source:ET
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Unnatural levy on natural gas

the Petroleum & Natural Gas Regulatory Board (PNGRB) announced a ‘turnover’ tax. The tax is on revenues earned from retailing CNG to automobiles and piped natural gas (PNG) to cities. Is this unexceptionable? It is not. It is a bad tax.

PNGRB was established by the Ministry of Petroleum and Natural Gas (MoPNG) in July 2007 (in accordance with PNGRB Act, 2006). The objective was to protect consumer and producer interests. Producers here mean entities engaged in specified activities relating to petroleum, petroleum products and natural gas in the downstream sector. The Board was also tasked to ensure uninterrupted and adequate supply of these products nationwide through promotion of competitive markets. That means, it was asked to regulate producers in the downstream sector, especially in the matter of seeking undue rent from monopolisation. This is a usual problem in local gas distribution networks and long distance pipeline carriers in the natural gas sector.

This remit, is important to know as we assess PNGRB’s ‘turnover’ tax. Retail gas distributors RIL and GAIL have strongly protested. But that’s not the point. There are both procedural and economic critiques against this decision.

Let’s look at the proposal in detail. As per the Gazette notification, the PNGRB has asked entities to pay Rs 2 crore for turnover of up to Rs 20,000 crore under the head ‘Other Charges’. For turnover of up to Rs 50,000 crore it has levied Rs 2 crore plus 0.008% of revenues in excess of Rs 20,000 crore. For turnover up to Rs 1,00,000 crore it will charge Rs 4.4 crore plus 0.005% of revenues more than Rs 50,000 crore. Besides this, 0.2% of capital expenditure during construction period will be payable. Besides the new tax, PNGRB has also notified fee payable by companies for registration, authorisation and filing complaints.

‘Other charges’ by their very nature are thus essentially a combination of specific and ad-valorem charges and have been levied in conformity with Section 4 of the PNGRB (Levy of Fee and Other Charges) Regulations, 2007. The section states that the entity which is undertaking either operation or construction of any of the activities of registration and/or authorisation under the provisions of the PNGRB Act, 2006 would be required to pay ‘other charges’ to the board annually within 15 days from the date of finalising its annual statement of accounts.

So, the entitlement to levy other charges by PNGRB is.

in concordance with the regulation. But the question is whether such charges can be imposed in the form of a ‘turnover tax’ by a regulator like PNGRB. The turnover tax is usually imposed by the government, and not by a regulator, in order to leave the supplier a profit deemed to be fair, with the rest going in the form of tax. However, if the cost of production exceeds the market price, a negative turnover tax (ie, a subsidy) is usually levied. The tax is usually cumulative in nature and encompasses both production and distribution chains. Thus it has a very high cascading effect and involves multiple taxations of inputs.

There’s another procedural question. ‘Other charges’ are designated for the downstream retailing sector. But do these include just a portion of turnover of retailing CNG and PNG or is the entire turnover the focus. This is especially relevant for an integrated company like RIL, which is involved in both production and distribution of natural gas. If the entire turnover is the focus, the levy has phenomenally negative implications for RIL.

The third procedural question is this: PNGRB is merely a regulator, so to whom will the revenue go and how will it be utilised? The economic critique is the following. ‘Other charges’ in the form of ‘turnover taxes’, because of its implicitly cascading nature, will hurt investments in the city gas distribution pipeline sector; investment spending is included in the base for the charges. The purchase of machines and equipments (together with other inputs) will fall under the levy’s purview. To date, only 19 cities are covered under the city gas distribution network through pipelines. This is a small number. The new levy will come as a big disincentive against further investment. It may also act as a disincentive against the nationwide distribution expansion plan for natural gas. Natural gas is seen as a viable and cleaner alternative to petrol and diesel. Usage of natural gas in India is at its nascent stage. Therefore, PNGRB must analyse the implications of the new tax. Also, it must be noted that PNGRB introduced the tax in a rather non-transparent manner.

Given all this it is hard to think that the tax is compatible with the Board’s remit of ensuring competitiveness and protecting producer and consumer interest. Natural gas is a sunrise sector. It doesn’t need a bad tax.
Source: Financial Express
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Gas and the city - far apart

Snarled in spats with established players and legal cases, the regulator has done little to streamline the process of expanding city gas networks.

Seldom have the ironies been as bizarre as in the case of city gas distribution (CGD) in the country. Long established CGD companies authorised by the government — and in some cases owned by it — have been at the receiving end of the regulator’s wrath while illegal entities have been allowed to continue with their squatting operations. Instead of the network expanding in a significant way, no new projects have come up in the last two years; on the other hand, expansion of existing projects was brought to a standstill for long periods although authorisations are now being accepted in some cases. This has been the paradox of regulation of the downstream gas sector.

With the courts entering the picture, the prospects of expanding the CGD network in the near future appear rather remote. This is because the functioning of the Petroleum and Natural Gas Regulatory Board (PNGRB) and its powers to license CGD companies has been challenged twice over — in a public interest litigation filed by a voluntary organisation and in a writ petition filed by a Supreme Court-mandated company. Both cases have been clubbed together by the Delhi High Court which is hearing the cases but the outcome seems a foregone conclusion since the government has admitted to the court that the regulator does not, indeed, have the power to issue any CGD authorisation! The supreme irony is that the key Section 16 of the PNGRB Act of 2006 that gives it powers of authorisation has not been notified so far.

How did things go so wrong on CGD? According to some analysts, the mess is entirely the making of the board which took a pugnacious stand on existing CGD entities — these include municipalities in Gujarat, public sector undertakings, joint ventures and private companies — some of which have been in operation for several decades. Almost from the word go, the five-member PNGRB, set up in October 2007, had expended much of its energies last year in questioning the authorisation given by the government to the handful of existing entities, specially the Delhi-based Indraprastha Gas Ltd (IGL). This not only delayed the expansion of CGD network but also stymied expansion of operations in the National Capital Region (NCR) where a critical Supreme Court’s directive to supply clean fuel to automobiles in the heavily polluted zone has been put on hold because of its injunctions against IGL.

The NCR imbroglio is a telling example of the PNGRB’s approach to CGD authorisation. IGL was set up in 1998 as a joint venture of the state-owned GAIL India, the public sector BPCL and the government of Delhi under a Supreme Court directive to clean up the heavily polluted NCR. This did not cut any ice with board which refused to let IGL proceed with expansion in Delhi initially and later in the NCR. Matters came to a head when the board included Ghaziabad, which forms part of NCR, in the list of seven cities put up for CGD bids in its second tranche.

The insistence of board — sources say it was the decision of the chairman — to put Ghaziabad to bid when IGL’s application for authorisation was pending with the PNGRB was all of a piece with its way of functioning. As industry saw it, IGL’s application was a mere formality since it had been working in Ghaziabad since 2002 and had already invested Rs 12 crore in the city for setting up two CNG stations and related infrastructure. The clincher in this case is that IGL has been working under the direction of the Environment Pollution Control Authority (EPCA) which reports to the apex court on pollution mitigation measures undertaken in the NCR and is in the process of laying pipelines and setting up another CNG station. A listed company, IGL is scheduled to spend Rs 76 crore this financial year and has drawn up plans for investment of Rs 300 crore over the next three years.

An outraged IGL has pointed out in its writ petition that the bid for Ghaziabad was called for even while the PNGRB was hearing its application for authorisation as the incumbent operator. Those familiar with the travails of setting up CGD networks point out that the board has shown little understanding of the problems of establishing such a business where getting land and a multitude of required local clearances take several years.

The importance of Ghaziabad is that it is far by the most promising location as responses to the PNGRB tender have revealed. It is a highly industrialised hub and investors expect to make handsome gains from supplying the industrial and commercial segment rather than from supplying domestic consumers or providing CNG for automobiles. So say industry insiders who point out that the board does not regulate marketing margins, leaving the investors free to charge their own rates. According to some credit rating agencies, the rate of return on capital employed can be as high as 20 per cent if companies leverage their financing ratios astutely. This would explain the scramble for Ghaziabad which has the largest number of contenders, including big oil companies (IOC and HPCL) and the omnipresent GAIL Gas which bids for all cities except those which Reliance Gas, a subsidiary of Reliance Industries, is angling for.


The surprise in the pack is Siti Energy, a little known outfit part-owned by a company floated by the Zee TV group. Siti’s bid is interesting primarily because it throws light on the functioning of the board. Although the company has shown assets of just Rs 2 crore against the stipulated net worth of Rs 150 crore for Ghaziabad bidders, some members of the board, it is learned, were keen to qualify the company ‘‘in the interests of fostering competition”. The company is seeking to include family jewellery and other assets like stocks to boost its net worth. However, strenuous objections from one of the members have forced the board to seek a legal opinion on the matter.

Ghaziabad is just one example of how the board’s handling of CGD projects is leading to problems all round. In June, the EPCA chairman Bhure Lal had written to Oil and Gas Minister Murli Deora warning that the regulator’s move would lead to more delays and jeopardise the work of pollution control in the NCR where a phenomenal 1.2 million vehicles ply daily. The letter had prompted Deora to ask the board to draw up a clear road map for rolling out CGD projects in a big way, specially since gas supplies are expected to be plentiful in coming months.

PNGRB’s target for setting up a CGD network across the country has been as ambitious as it has been elusive. A schedule unveiled last December had set a target of covering 86 towns and cities with a population of 100 million by 2011. So far, letters of intent have been issued for just six cities tendered in the first tranche, leaving the CGD map woefully sparse: India has just a dozen odd urban centres that have been in the CGD network for decades compared with well over a 1,000 in Pakistan. The picture is unlikely to improve soon because of the legal tangle. Whatever the Delhi High Court decides, it is time the regulator took a look at its record on expanding the CGD network and cleared the blockages, specially attitudinal.
Source: B.S
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