Keen not to suffer any loss on its royalty, the government is closely monitoring talks between the Ambani brothers over the price of gas from the Krishna-Godavari basin in the country's south.
Mukesh Ambani's Reliance Industries Ltd (RIL) is negotiating the sale of the gas in D6 block, expected to be available from July 2008, to Anil Ambani's Reliance Natural Resources Ltd (RNRL) and the state-owned power major NTPC Ltd.
While the petroleum ministry doesn't plan to interfere in the talks, it has made it clear that the final sale price of gas would have to be favourable to all stakeholders, the government included.
"The deal cannot be at a loss to any party. And the government is a party," a senior petroleum ministry official said.
The government gets its revenues as royalty and a defined share of profit of petroleum/gas after recovery of the investments made by the exploration company.
The lower the gas price, the longer it will take for the government to start getting returns from the gas sale.
According to the production-sharing contract (PSC), the government share in profit will increase to over 70 per cent once RIL recovered its investment plus agreed returns.
With estimated in-place reserves of 11 trillion cubic feet in block D6, RIL is expected to produce around 40 million standard cubic metres per day (MMSCMD) natural gas from the offshore block, the biggest gas find of 2002.
Of the total production, 28 MMSCMD has been earmarked for RNRL and 12 MMSCMD for NTPC.
Reacting to reports that Reliance Industries had finalised the gas sale deal at $2.34 per million British thermal unit (mbtu), the official said commercial gas from joint venture blocks was selling at $4.75 per mbtu. So the price could not be lowered to an extent where the government's revenue is affected.
"Whatever price RIL sells at, we will adopt an arms length approach and seek returns on competitive price for valuation of our share," the official said.
The ministry has been maintained a hands off position even in the matter of NTPC Ltd despite requests from the power ministry to intervene and ensure that RIL keeps its commitment to supply gas below $3 per mbtu.
Stating that the government is not a party to the original agreements entered into by RIL with either NTPC or RNRL, which is also planning to use the gas for power generation, officials said with global gas prices at all time high it did not make sense to sell at subsidised rates from exploration blocks given on competitive terms.
Official sources pointed out that except for state-owned Oil and Natural Gas Corp (ONGC) operated blocks, state-owned GAIL (India) Ltd was buying gas at commercial rates.
From the southern field Ravva, it was getting gas at $3.50 per mbtu while from Panna-Mukta-Tapti field, where RIL is a partner, it was getting gas at $4.75 per mbtu.
"Irrespective of at what cost RIL sells gas, the government's share in gas (profit petroleum) and royalty will be computed at competitive rates. We are working on broad guidelines on the pricing front and these will be in place shortly," the official said.