Anil Ambani Group firm Reliance Natural Resources Ltd has questioned oil ministry's right to approve the price at which a producer sells gas to customers, saying its nod was needed only for the formula or basis of pricing of gas for computing government's share in the spoils.
Reliance Industries Ltd had in April sought petroleum ministry's nod to sell gas from its gas field off Andhra coast to RNRL at a delivered price of $3.18 per million British thermal unit (mBtu), a price which a section in the establishment felt was 'too low' and affecting government revenue.
Official sources said RNRL, in a May 15, 2006 letter to Petroleum Minister Murli Deora, quoted a legal opinion from former Chief Justice of India, A M Ahmadi, to emphasise that the production sharing contract (between the government and operator of the field) did not envisage seeking approval for the price, but only the basis for arriving at the price.
Ahmadi in his legal opinion stated that "the role of the government is to grant approval to the formula or basis for price determination and not to determine the price" as factors determining price changed with time but the formula or basis remains constant.
Sources said after being approached by RIL, the ministry sought the opinion of upstream regulator directorate general of hydrocarbons, which in a letter dated May 5, stated that the proposal did not mention "the methodology followed by RIL to fix the buyer on arms-length basis" and sought clarity on pricing methodology.
"...the production sharing contract does not envisage any price approval to be obtained by contractor (or operator of an oil/gas block) for sale of gas to consumers and that approval is only requied for the formula or basis of pricing of gas for the purpose of computing profit petroleum (government's share in the hydrocarbons produced)," RNRL wrote to Deora on May 15, 2006.
Amhadi in his legal opinion stated that under the PSC (for the gas field), "the role of the government is to grant approval to the formula or basis for price determination and not to determine the price."
"This is for the obvious reason that the factors relevant for price determination can not be expected to remain constant during the entire tenure of the contract, but the formula or basis to be evolved would take care of the changing determinants," he said.
"RIL is required to seek approval from the government of the 'formula or basis' for price fixation... and not the price itself; it may vary from time to time depending on the changing factors. This is to avoid the need to approach the government, time and again."
RIL had sought ministry's nod to sell 28 million cubic meters of natural gas from its Bay of Bengal fields to Anil Ambani Group's ambitious 5,600 MW Dadri power project in Uttar Pradesh for $2.34 per mBtu.
Added to this, would be $0.12 per mBtu marketing cost and another $0.72 per mBtu cost of transporting it from Kakinada in Andhra Pradesh to Dadri.
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