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Minor tweak in Reliance gas price

New Delhi, Sept. 12: The price of gas that will flow from Reliance Industries’ concession in the Krishna-Godavari basin sometime next year has been fixed at $4.2 per million British thermal unit (mBtu) at the land fall point.

The decision was taken today at a meeting of the empowered group of ministers headed by external affairs minister Pranab Mukherjee.

It caps months of controversy over a fiendishly complex formula that Reliance had used to arrive at the price through a bidding process held in May. The price set by the EGoM is about 5.4 per cent lower than RIL's asking price of $4.44 per mBtu.

The announcement came after a stormy meeting of the EGoM where fertiliser minister Ram Vilas Paswan was the only one to oppose Reliance's gas pricing formula.

At the meeting, ministers said Pranab Mukherjee would take a final call on the pricing formula.

However, later in the evening, the petroleum ministry said the EGoM had “decided that the price formula submitted by Reliance and Niko Resources, may be accepted with modifications according to the recommendations of the Prime Minister's economic advisory council, including denomination of the entire formula in US dollars. For all NELP-I to NELP-VI contracts and natural gas price calculation, the constant will be pegged at $2.50 per mBtu.”

The bidders had been asked to bid for only the value of a constant ‘C’ in the formula. C was supposed to be a positive integer and was not supposed to change till March 31, 2012. The fertiliser companies — Rashtriya Chemicals and Fertilisers, Kribhco, Nagarjuna, Iffco and Chambal Fertilisers — had all bid a value of 1.

However, power companies had stumped up different bids for C. Tata Power and Torrent of Gujarat had come up with the top bid of 10, the Maharashtra State Electricity Board had bid 8, GVK Power 5 and Konaseema Power of Andhra 4.

The EGoM also decided that the cap for the crude price in the variable portion of the formula would be frozen at $60 per barrel instead of $65 per barrel that was proposed by RIL and Niko Resources of Canada, its partner. This would, in turn, translate into a lower consumer price.

The price formula will be valid for five years from the date of commencement of the first commercial production and supply.

Analysts said the new pricing formula meant gas supplies to fertiliser factories and electricity utilities from Reliance's finds would be priced between $4.6 and $5.2 per mBtu.

Paswan had been arguing that any pricing over $4 per mBtu against a current price of $ 2.5 per mBtu at which gas is sold to fertiliser units and power utilities would mean a huge increase in subsidy payouts.

The decisions taken at today's EGoM meeting will be without prejudice to the court battles that Reliance is fighting with the National Thermal Power Corporation and Anil Ambani’s Reliance Natural Resources Ltd (RNRL).

In 2004, Reliance had bid a gas supply price of $2.34 per mBtu in response to an NTPC order. It emerged as the lowest bidder and won the contract. It later reneged on the contract on a technicality after world gas prices started moving up.

When the Dhirubhai Ambani’s empire was carved up between brother Mukesh and Anil, it was decided that Reliance would supply gas to the Anil group firms on the same terms as it offered to NTPC.

The gas was to be used for Reliance Energy’s proposed power project in Dadri. Anil Ambani is fighting a court battle to force Mukesh to keep his part of the deal.

Reliance has been arguing that its development costs have ballooned in the intervening years. It had originally submitted a capital expenditure plan for $ 2.47 billion for an initial production of 40 million metric standard cubic metres per day.

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