The Law Ministry and the Planning Commission have backed an Oil Ministry proposal to allow Reliance Industries to almost double the price of gas from April in return for a USD 90 million bank guarantee every quarter.
The bank guarantee, which will be equivalent to the incremental revenue that RIL will get from the new gas price, will be encashed if it is proved that the company hoarded gas or deliberately suppressed production at the main Dhirubhai-1 and 3 (D1&D3) fields in the eastern offshore KG-D6 block.
"Both the Planning Commission and the Law Ministry are agreeable to the proposal set out in a draft cabinet note sent to them for comments," an Oil Ministry official said here.
The bank guarantee will cover the difference between the current gas price of USD 4.2 per million British thermal units and the rate of USD 8.2-8.4 per million Btu, which will come into effect from April 1.
"We are awaiting Finance Ministry comments before a final note is taken to the Cabinet," the official said, adding that the new gas price, which will be applicable uniformly to all producers, will be notified thereafter.
The Oil Ministry had previously proposed that RIL be forced to sell gas from the D1&D3 fields at the current rate until it is proved that the 80 per cent fall in output at the fields was due to natural reasons or it makes up for the shortfall in production since 2010-11.
This would have meant pronouncing RIL guilty even before trial, he said.
The veracity of allegations that RIL hoarded gas in anticipation of a price hike can be established by arbitration or a third-party expert, a process that can take 1-2 years.
"If we forced RIL to sell gas at USD 4.2 and at a later date it was established that output had fallen due to geological reasons and there was no hoarding, then who would make good the difference between USD 4.2 and the price they are actually eligible from April 1, 2014?"
The official said the government cannot ask consumers to pay a higher price for gas consumed in the period taken to decide on the hoarding charge.
The government, he said, could have charged customers the higher price from April 1 and paid RIL the lower rate while keeping the difference in an escrow account until the issue was sorted out. However, the production sharing contract does not provide for escrow accounts.
The bank guarantee will be calculated quarterly as the gas price will change every three months, based on average international hub prices and the rate at which LNG (liquefied natural gas) is imported in India.
The bank guarantee will be about USD 90 million in the first quarter of fiscal 2014-15, considering an anticipated output of less than 8 million metric standard cubic meters per day (mmscmd) from D1&D3, after netting the excess royalty that RIL will pay at the higher price.
The official said it is a win-win situation for both sides. The bank guarantee secures the government's interests and the higher gas price protects the operator's interests.
If the hoarding allegations are true, the bank guarantees will be encashed, with interest, for the period from April 1 to the date the charges are proved.
From April 1, all domestic gas will be priced at an average of international hub prices and imported LNG costs. Prices will be revised quarterly and will be based on the previous one-year average.
RIL will have to furnish a bank guarantee of over USD 90 million, assuming a gas price of USD 8.4 per million Btu in April.
A lower gas price would have been the second penalty imposed by the Oil Ministry for RIL falling short of stated production targets. It had already levied a USD 1.8 billion penalty for the output drop, an issue that is in arbitration.
Gas production from the D1&D3 fields fell to 8.7 mmscmd this month from a peak of 54 mmscmd in March 2010.
Production has been below target since the latter half of fiscal 2010-11 and should currently have been 80 mmscmd, as per the 2006 investment plan.
Output from the MA oil and gas field in the KG-D6 block, too, has fallen over 62 per cent.
However, the ministry and the Directorate General of Hydrocarbons, the oil regulator, have agreed with RIL's reasoning that geological complexity was responsible for the drop and approved the higher price for the MA field's output.