» Business » Govt plans to stop RIL from selling crude to Jamnagar refinery

Govt plans to stop RIL from selling crude to Jamnagar refinery

Source: PTI
August 20, 2014 16:00 IST
Get Rediff News in your Inbox:

The Oil Ministry is considering ordering Reliance Industries to stop selling KG-D6 crude oil to its Jamnagar refinery and instead sell it to Chennai Petroleum Corp Ltd (CPCL) at lower rates.

The Production Sharing Contract (PSC) mandates producers to sell crude oil at the best available market rate so as to ensure highest profit petroleum and royalty to the government.

RIL, which sold crude oil from the MA oil field in the predominantly gas-rich KG-D6 block to CPCL during first five years of production on negotiated terms, floated a tender for sale of 2.5 million barrels of oil in 2014-15.

Jamnagar refinery of RIL won the tender as CPCL offered a pricing formula that was about $4-5 per barrel less than the formula quoted by the private sector refiner.

The Oil Ministry is now of the view that sale of crude oil is to be done on arms length basis and "therefore cannot be done to an affiliate," a senior ministry official said. It believes RIL's Jamnagar refinery would not qualify for this bidding as per PSC provision and the company would have to go for the next option which in this case is CPCL.

Also, RIL may go for a fresh tender for getting an arms length price. The official said that in the interim period, the ministry is considering directing RIL to stop sale to its affiliate Jamnagar refinery and sell it to CPCL at the price quoted by it.

RIL however refuted this view saying that "there is no restriction in the PSC that the oil and gas cannot be sold to related party as long as an arms-length process is followed".

While higher price would give government more profit petroleum and royalty, CPCL being a subsidiary of IOC, does not pay any dividend to government on its profit.

"PSC obliges Contractor to sell at the market determined price to the benefit of all Parties. The sell at higher price to RIL Jamnagar refinery would entail additional profit petroleum and royalty.

Petroleum Ministry has never questioned that the process followed is in violation of PSC," a company spokesperson said.

RIL said it earlier sold the crude oil and is now selling condensate to PSUs under similar process followed wherein RIL Jamnagar was not the highest bidder.

"No question was raised as to the same bidding process," he said.

The ministry official said CPCL wanted the pricing mechanism to be reopened as it felt a premium of 2 per cent over widely traded Bonny Light crude oil, reflecting quality differential, was not justified.

The crude, CPCL felt, produced more naphtha and less of high value diesel, and so offered a price formula which was about $4-5 a barrel lower than the one offered by RIL.

The official said: "It appears that terms and conditions of the tender has been framed in such a manner that none other than RIL Jamnagar refinery could participate." RIL spokesperson however refuted this saying that "having followed a robust transparent bidding process, the allegation that RIL has tailor-made the formula is only an after- thought."  

RIL said KG-D6 crude oil was being sold to CPCL and HPCL on spot contract basis since November 2008 and CPCL has been the sole buyer since April 2012.

"Fresh tenders, with payment security as a condition to avoid any forced withholding outside any judicial process, were invited on April 10 from all oil refining companies in India -- IOC, CPCL, HPCL, BPCL, MRPL, Essar Oil and RIL -- for sale of spot cargoes of KGD6 crude oil during the period April 2014 – March 2015," the spokesperson said.

Copies of the tender invitation letters were sent to the ministry on June 11, 2014. "On the request of CPCL, the last date of submission of bids was extended from April 25 to May 7," it said, adding that the copies of the bids received were sent to oil ministry on June 11.

The bidders were asked to quote the crude oil price as per the formula given in the Tender Invitation document.

This formula, inter-alia, provided 'D' as a biddable element. "While both CPCL and RIL Jamnagar refinery quoted a 'D' of Zero USD per barrel, CPCL's bid was conditional.

"CPCL accepted the condition of providing Letter of Credit (LC), provided LC charges are borne by the Seller.

CPCL also stated in their bid that the Pricing Mechanism must be reopened and that the sellers have to justify the component 'C', which is a composite premium of 2 per cent over Bonny Light, reflecting quality differential, based on the present quality of KG-D6 crude oil," the spokersperson said.

RIL said even though the tender document clearly stated no conditional bids will be accepted, in view of long business relations with CPCL, the suggestion to bear the LC charges was accepted and it was given opportunity to submit a revised bid. "CPCL submitted a revised bid on May 26. In its revised bid, CPCL reiterated its earlier position that the pricing mechanism," the spokesperson said.

During discussions with CPCL on June 6, "CPCL stated that it will not be possible for them to continue to link the price of KGD6 crude to Bonny Light and sought to link it to DF Condensate through a GPW Differential plus a Discount, for under recoveries due to high naphtha content," RIL said. "CPCL quoted this discount at  $4 per barrel," the spokesperson said, adding that the pricing formula proposed by CPCL works out to about USD 4–5 per barrel less than the pricing formula quoted by RIL Jamnagar.

"Since even after giving CPCL an opportunity to revise their price bid, RIL Jamnagar Refinery's offer is highest, accordingly we have no option but to accept RIL Jamnagar's bid for lifting of KGD6 crude oil," the spokesperson said.

Get Rediff News in your Inbox:
Source: PTI© Copyright 2020 PTI. All rights reserved. Republication or redistribution of PTI content, including by framing or similar means, is expressly prohibited without the prior written consent.