i Develop Stocks Advisory

Govt may replace K-G cap With global crude oil price hovering around $130 per barrel mark, the government may be forced to revise Reliance Industries’ (RIL) $4.20 per unit (million British thermal unit) ceiling price approved in September 2007. It is said the discovered price of $4.20 per mmBtu was benchmarked against the crude oil price, capped at $60 per barrel. As the cap is significantly lower than the current market price of crude oil, it is feared this would reduce the value of government’s profit-share considerably. RIL is expected to start production of 40 million metric standard cubic meter (MMSCMD) of gas from its K-G basin in the second half of the fiscal year. Sources in know said there has been no formal decision on the issue, but it is possible the gas price formula would be revisited by raising the cap for the crude oil price from $60 per barrel to a level that would reflect the market reality. It is not known whether RIL would be asked to invite fresh bids from the 10 buyers on the basis of revised formula. The case for a fresh price discovery has also been supported by ONGC, demanding market-related price for new and additional gas at around $4.75 per mmBtu. In a letter to the government, the company has said that “ONGC should be permitted market-determined price for additional gas, and gas from new and marginal fields.” As the production of 40 MMSCMD gas is expected to start from the third quarter of 2008-09 and only 26 MMSCMD gas is committed to be supplied to the 10 fertiliser and power sector buyers, it is feared the balance 14 MMSCMD gas could be sold to other sectors, petrochemicals and city gas distribution companies, along the East-West and HVJ pipelines at the throwaway price, leading to severe loss to the government. Official sources have said that once the gas production starts, it could not be stopped, irrespective of court cases, and the gas has to be supplied to customers along the pipeline. After fulfilling the needs of fertiliser and gas-based power companies, the balance gas would have to be sold to the facilities around the gas pipeline. The empowered group of ministers (EGoM), while approving the gas pricing formula under the production-sharing contracts on September 12, 2007, pegged the constant at $2.50 per mmBtu and froze the price of crude in the variable portion of the formula at $60 per barrel instead of $65 per barrel, as proposed by RIL. The formula, that discovered a price of $4.20 per mmBtu for the K-G gas, would be valid for five years from the date of commencement of first commercial production and supply.