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Reliance gas price formula okayed with small tweak

business Updated: Sep 12, 2007 21:25 IST
Deepak Joshi
Deepak Joshi
Hindustan Times
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The government on Wednesday approved the gas pricing formula of Reliance Industries' Krishna-Godavari (KG) basin gas, with a minor modification regarding exchange-rate fluctuations.

The Empowered Group of Ministers (EGoM), headed by External Affairs Minister Pranab Mukherjee, approved the formula by removing the exchange-rate component and lowering the ceiling of the price-band from the benchmark $65 to $60 a barrel of crude oil.

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

The EGoM heard conflicting claims on the pricing of gas from one of India’s largest gas finds in recent years and unanimously agreed that commitments regarding allowing market-driven prices for gas finds under various New Exploration Licensing Policy (NELP) rounds must be honoured.

An official statement said, “The decision of the EGoM will lead to a gas price of $4.20 per mBtu at delivery point, which translates into a price of Rs 172.20 per mBtu at the prevailing rupee-dollar exchange rate. The approved price is 8.32 per cent lower than the price proposed by the contractors.

The panel also noted it will not be in the county’s interest to renege from the contractual provisions under the production-sharing contracts entered into in good faith under the NELP, adding that sanctity of the signed, legally-binding contracts should be maintained.

“The price-discovery process on arms length basis will be adopted in future NELP contracts only after the approval of the price basis/formula by the government. The price discovered through this process would be applicable to all the sectors uniformly,” the statement said.

The approved price formula would be effective for the present term of gas supply, namely five years, and revised at the end of this period with government approval for the purpose of valuation. The government would value all the gas sold as per the present formula, for the purpose of government's share, barring those sales that take place at a higher rate than those derived by the approved formula. Reliance had proposed a price formula linked to Brent crude oil prices with a floor of $ 25 per barrel and a ceiling of $ 65 per barrel.

Sources said Fertiliser Minister Ramvilas Paswan wanted guaranteed gas supplies to fertiliser and steel plants, while Power Minister Sushilkumar Shinde is believed to have said that RIL should honour the court judgment in the case supply of gas to NTPC.

RIL had in 2004 bid $ 2.34 per mBtu price in an NTPC tender but the contract could not be implemented due to differences over contractual provisions.