Mumbai, June 13: Tata Power and the Torrent group of Gujarat are understood to have emerged as the top bidders for gas generated from Reliance Industries Ltd’s (RIL) Krishna Godavari basin.

The bidders were asked to bid for only one of three components that were built into a devilishly complicated formula proposed by RIL for the KG gas pricing which must be ratified by the government.

The three components that has been proposed by RIL include a constant ‘C’, which is a number that won’t be revised till March 2012 — and this is the only element that the power and fertiliser companies were asked to bid for. There were two other exogenous factors built into the formula — the prevailing Brent crude price and the rupee-dollar exchange rate.

Tata and Torrent quoted a constant of 10 among a group of five power companies while all the five fertiliser companies pitched it at just 1.

The bids translated into a wellhead price range between $4.51 and $4.71 per mmbtu — which is almost twice the price of $2.34 per mmbtu at which Mukesh Ambani is obliged to supply gas to brother Anil Ambani’s company Reliance Natural Resources and its two affiliates, Reliance Energy and Reliance Patalganga Power. The government must now decide whether the formula is fair and provides a transparent procedure for price discovery.

A report from CLSA which analysed the formula said that the auction may have its limitations as a way of determining market-discovered-price as it was held with select users and it appeared to leave little flexibility for bidders on account of the structure of the formula.

Somshankar Sinha of CLSA added that based on various components of the formula, at current crude price, it indicates a price of $4.58 per mmbtu for its gas which is in line with RIL’s informal guidance of $4.25 to 4.75/mmbtu.

Reports indicate that the fertiliser companies have expressed their apprehensions about the RIL formula.

RIL intends to double production to 80 million metric standard cubic metre per day (mmscmd) in the KG block. The company will incur a capital expenditure of $ 5.2 billion on account of the enhanced production. The block was awarded under NELP-1 bidding round and RIL, as operator of the block holds 90 per cent of the participating interest and NIKO Resources Ltd, Canada, has the remaining 10 per cent.