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Tuesday, February 23, 2010

RIL need not pay royalty on marketing margin: Deora

Oil Minister Murli Deora today said Reliance Industries need not club marketing margin with the gas sale price for purpose of calculating royalty -- a statement that overturns a suggestion by oil regulator DGH. DGH had wanted the $0.135 per million British thermal unit margin, which RIL charges towards marketing cost and risks, to be added to the sale price of $4.20 per mmBtu for calculating royalty and profit share to the government."The Production Sharing Contract (under which firms like RIL produces oil and gas from areas given by the Government) does not envisage sharing of revenue earned by the contractor (RIL) on the marketing margin between the government and the Contractor," Deora told Rajya Sabha.

Under the PSC, the government has approved a price formula for sale of gas from KG basin D6 field at the delivery point (the place where RIL transfer custody for sale to customer). The $4.20 per mmBtu is the price fixed for five years. "The marketing margin is beyond the delivery point and arises as a result of Gas Sale and Purchase Agreement signed between the seller and the buyer," Deora said in a written reply to a question by member Amar Singh.

"The PSC provides for sharing of revenue between the government and the contractor (RIL) of the sale of gas at the said price at the delivery point," he said, adding that marketing margin was settled between buyer and seller and Government has neither decided nor approved the same. Deora said marketing margin arises as a result of Gas Sale and Purchase Agreement (GSPA) signed between the seller and the buyer and was mutually settled between them."The rate of marketing margin neither in the case of KG D6 gas nor in any other case has been decided or approved by the government," he said.

Under the PSC, while the revenues from the gas sales are shared between the government and the contractor, the costs and risks associated in marketing efforts undertaken by the contractor in generating these revenues are to be borne by the contractor and are not shared by the government.An Empowered Group of Ministers (EGoM) had fixed $4.20 per mmBtu as the landfall point price of gas and levies beyond that like the marketing margin were settled between the buyers and sellers of gas.

Under normal circumstances, the price of the commodity is supposed to include all risks and costs associated with the sale of a commodity. However, under the PSC mechanism, the marketing costs and risks are not covered.

RIL charges marketing margin costs, incurred in customer identification, execution and sales of a Gas Sales Agreement, customer registration and activation, gas sales planning, daily gas sales operations, gas accounting, invoicing and collection and establishment of regional offices, and risks like penalties and liquidated damages, volume risks, credit risks and claims and settlement of disputes.

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