Niko Resources and BP, which partner Mukesh Ambani-promoted Reliance Industries Ltd (RIL) in the KG-D6 block, might not get to increase the price of gas produced from the block, in spite of Cabinet intervention.
According to a senior government official, to avail of higher prices, the two companies will need to furnish bank guarantees and be part of the arbitration process initiated by RIL against the government.
The issue now threatens to impact gas buyers, since sales and purchase agreements signed by RIL are valid only till the end of this month.
The Cabinet Committee on Economic Affairs (CCEA) had on December 19 last year decided to allow RIL to almost double the price of natural gas produced from KG-D6 from April 1, provided the company gave a bank guarantee to cover its liability if charges of hoarding gas against it were proved.
The officials clarify this bank guarantee will apply only to RIL, as it is the only company that has gone ahead with the arbitration.
"Though the bank guarantee will soon be notified by the law ministry, there are certain technical difficulties. Till both BP and Niko become part of the arbitration process, they won't be allowed to draw higher gas price.
Also, Cabinet had cleared the bank guarantee for RIL alone," said an official.
BP, on the other hand, contests the claim, saying the Cabinet decision allowed "the contractor" to sell gas from D1 and D3 fields at the revised price. "Each of BP, RIL and Niko is a contractor and producer of gas from D1 and D3 under the KG-D6 Block production-sharing contract (PSC).
BP, RIL and Niko are working closely with the government to implement the gas pricing guidelines, 2014, in accordance with CCEA's decision," the company said in response to queries from Business Standard.
While RIL has been citing geological complexities for a drop in KG-D6 production, the petroleum ministry and the Directorate General of Hydrocarbons hold the company responsible for not drilling the committed number of wells and, thereby, bringing down output.
The issue has led to an arbitration process, which may take at least two years to be resolved.
Another crisis looming over RIL is that it is left with little time to finalise new gas sales and purchase agreements, as its current agreements expire on March 31.
"As it stands today, the government has approved a revised price that also applies to D1 and D3 gas, subject to the contractor giving a bank guarantee - and a bank guarantee will accordingly be submitted. Any technical issues related to the language of the guarantee or its amount can be resolved separately and will never be a reason for selling gas at a price different from the price approved under the PSC.
We are hopeful about the new pricing from April 1," a spokesperson for RIL told Business Standard.
The law ministry will soon come up with its final notification on the bank guarantee.
The price of all natural gas produced in the country is likely to be about $8 per million British thermal unit, with the bank guarantee for KG-D6 gas in the range of $100-120 million per quarter.
IN A QUANDARY
* 154 mscmd: Total shortfall in production from KG-D6 during four years to 2013-14 (compared with targets approved earlier) - 5 million standard cubic metres a day (mscmd) in 2010-11, 28 mscmd in 2011-12, 55 mscmd in 2012-13 and 66 mscmd in 2013-14.
* Dec 19, '13: The Cabinet Committee on Economic Affairs decides to allow RIL to almost double KG-D6 natural gas price from April 1, 2014, provided the company gives a bank guarantee to cover its liability if gas-hoarding charges against it are proved.
* Mar 31: RIL is left with little time to finalise new gas sales and purchase agreements, because its current agreement expires this month end.