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Rediff.com  » Business » RIL slaps arbitration notice on govt

RIL slaps arbitration notice on govt

Last updated on: May 11, 2014 13:48 IST

An oil rigDays after telecom major Vodafone served an arbitration notice on the government in a Rs 23,800-crore (Rs 238 billion) tax dispute, Reliance Industries Ltd (RIL) took a similar step on Saturday.

The Mukesh Ambani-promoted firm, along with its partners, served an arbitration notice over implementation of a new gas price from April 1, 2014.  

The company has charged the petroleum and natural gas ministry with arbitrariness in forcing it to sell gas at $4.2 per million British thermal units (mBtu) after April 1, 2014, even though natural gas pricing guidelines were notified on January 10 this year. 

“This is in contravention of the PSC (production-sharing contract) and detrimental to the economic interests of the contractor group and the government.

Under protest but in good faith, we have kept supplying gas at $4.2 an mBtu to the customers,” Reliance Industries said in a press statement issued on Saturday.  

This is the second arbitration notice issued by RIL on the KG-D6 gas field in the Krishna-Godavari (K-G) basin off the Andhra Pradesh coast.

In November 2011, RIL had served an arbitration notice to the petroleum & natural gas ministry over its move to disallow some of the expenditure incurred in the KG-D6 gas field because of declining natural gas production.  

Cost recovery allows a company to deduct costs from production before sharing it with the government. RIL had then said limiting the amount of expenditure the company could recoup from its flagging KG-D6 fields was illegal and outside the PSC.

Arbitration proceedings on this issue are yet to begin. The third arbitrator was appointed by the Supreme Court last month after more than two years of legal wrangling.  

The natural gas pricing guidelines were announced on January 10 but the new price is yet to be notified. “The continuing delay on part of the Government of India in notifying the price in accordance with the approved formula for the gas to be sold has left the parties with no other option but to pursue this course of action. Without this clarity, the parties are unable to sanction planned investments of close to $4 billion this year,” RIL said on Saturday.  

RIL said there was no gas price for its KG-D6 production from April 1, a senior government official said, by the Supreme Court judgment in the Reliance Industries versus Reliance Natural Resources case, the petroleum & natural gas ministry had a right to set the price, and the current notified price was $4.2 an mBtu.  

Reliance Industries said the delay in notifying the new price would impact the ability of the parties to develop other significant discoveries made last year. “We have five trillion cubic feet of discovered gas resources in this block that await investment.

These resources need clarity on long-term gas prices to be developed economically,” the company said.  

RIL, along with its partners BP and Niko Resources, is planning to invest $8-10 billion in the next few years to significantly increase production from the KG-D6 block.  

Under Article 21 of the PSC, the natural gas produced is to be sold “at arms-length price to the benefit of parties to the contract”. The current price of $4.2 an mBtu was fixed for five years ended March 31, 2014, under a formula given by RIL though the government decided to cap the price.  

The Rangarajan panel, set up to review natural gas pricing, in 2013 recommend a price that took an average of the producer price of liquefied natural gas imports to India and the prices prevalent in the US, Europe and Japan.

“The Rangrajan formula was not an arms-length price according to the PSC, yet it showed intent to move towards and transition to arms-length pricing,” RIL said in its statement.  

The Cabinet approved the decision in June last year but the petroleum ministry, after a political furore, sent back the matter for a bank-guarantee mechanism.

All other gas producers were to get the new price from April 1, but RIL had to give a bank guarantee equivalent to the increase in price it would have got for gas volumes falling short of the projected production.  

While the government was still debating about parties to the bank guarantee, the model code of conduct for polls kicked in from March 5.

The Election Commission denied permission for a revision in the price of gas till the code of conduct was lifted on May 16.  

Reliance Industries said the gas price should be announced with effect from April 1, 2014, given that gas sales contracts had expired in March 2014.

The ministry has indicated gas prices will only be announced for the second quarter of 2014.  

Steppin on the gas

2011  

* Petroleum ministry serves a notice on RIL disallowing $457-million cost till 2010-11 and $1.005-billion till 2011-12; also levies a penalty of $781 million  

* RIL initiates arbitration proceedings against levy of $1.8-billion penalties for fall in KG-D6 gas production  

2013  

* Cabinet approves the C Rangarajan formula for all gas producers; price hike is to come into effect from April 1, 2014. 

2014  

* Gas pricing guidelines stipulate that a new gas price will apply to all producers except RIL. 

* RIL is asked to furnish bank guarantees equivalent to the incremental revenue it would get from the new rate.

* The bank guarantee is to be encashed if it is proved that RIL deliberately produced less gas from the D1 and D3 fields in KG-D6.  

* RIL agrees to the condition.  

* BP and Niko, formally join the arbitration on cost recovery.  

* The Election Commission objects to gas price hike, as the model code of conduct for general elections is in force; price hike is not effected from April 1. 

* RIL goes for arbitration against the government for not increasing price from April 1.

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