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Gas price prop for RIL

New Delhi, Dec. 19: The government today cleared the decks for Reliance Industries to sell natural gas at new prices from April provided the company gave a bank guarantee to cover its liability if hoarding charges against it were proved.

“The contractor will be allowed to sell D1 and D3 (fields) gas at revised prices from April 1, 2014. The sale will be permitted on the basis of a bank guarantee by RIL in favour of the government,” petroleum minister M. Veerappa Moily told newspersons while announcing the decision of the cabinet committee on economic affairs (CCEA).

The bank guarantee will cover the difference between the current gas price of $4.2 per million British thermal unit (mBtu) and the revised rate, which is expected to be about $8.4 per mBtu, to come into effect from April.

The bank guarantee of around $9 billion — assuming prices are $8.4 per mBtu — would be encashed if it is proved that RIL hoarded gas or deliberately suppressed production at the Dhirubhai-1 and 3 (D1 and D3) fields in the eastern offshore KG-D6 block.

RIL’s total shortfall in production from KG-D6 in the last four years is 154 million metric standard cubic metres per day (mmscmd). After the petroleum ministry imposed a penalty of $1 billion for the shortfall, RIL had initiated an arbitration process, which is pending. The issue had held up notification of the new pricing formula.

The capex plans of RIL, too, were scaled down from $8.84 billion to $5.93 billion.

The CCEA, headed by Prime Minister Manmohan Singh, has also decided that there will be no change in the Rangarajan formula of pricing domestic gas — both conventional and non-conventional such as coal-bed methane and shale gas — at an average of international hub rates and the cost of imported liquefied natural gas (LNG).

“Cap or floor on gas prices is not required to be stipulated in the new formula,” Moily said.

The government approved the Rangarajan formula in June. The finance ministry had wanted certain changes in the formula by excluding the price of spot LNG purchases, which it said was highly volatile. It had also favoured a cap, arguing that sudden increases in gas prices could affect electricity and fertiliser prices.

The government had in 2007 fixed a price of $4.2 per mmBtu for gas from the KG-D6 block for the first five years of production. KG-D6 fields began production on April 1, 2009, and the current price expires on March 31, 2014.

The Fertiliser Association of India had criticised the hike in natural gas prices, saying, “If urea prices are not raised in proportionate to gas price, the extra subsidy burden will be Rs 11,000 crore per annum.” The fertiliser subsidy for the current fiscal is budgeted at Rs 65,972 crore.

Power producer NTPC said the hike in gas prices would be passed on to consumers. It said every dollar increase in gas price led to a 50 paise jump in the cost of generation for the state-owned firm.

Push for methane

The government today allowed state-owned Coal India and its subsidiaries to produce natural gas from its coal blocks without any competitive bidding.

Sources said CIL held at least 20 per cent of the estimated 60 billion tonnes of coal resources in India. Its mines in eight states are estimated to have CBM reserves of 3.5-4 trillion cubic feet.

Current regulations do not allow simultaneous extraction of methane and coal by mining firms.

Sweetener for mills

The government has decided to provide interest-free loans of Rs 6,600 crore to cash-starved sugar mills to make payments to cane farmers. The entire interest burden, estimated at Rs 2,750 crore over the next five years, will be borne by the government.

WTO stand

The cabinet today approved India’s stand at the WTO meeting in Bali where it was decided that the outgo towards farm subsidies in developing countries, including India, would not be challenged at the global forum until a permanent solution was reached.

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