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Govt, RIL continue to fight over KG D6 gas price at the cost of national interest

The Krishna-Godavari Basin has again become the hotbed of action. The Modi govt has acted tough against Reliance Industries, opposing its demand for arbitration for a revision in gas price.

Running out of Gas

The Krishna-Godavari (KG) Basin has again become the hotbed of action. The Modi government has acted tough against Reliance Industries (RIL), the lead developer of the KG D6 block, opposing its demand for arbitration for a revision in gas price. The government has argued that natural gas pricing was its exclusive right as a trustee of the people. Hence, it maintains, RIL has no right to initiate arbitration proceedings over pricing and the Production Sharing Contract (PSC) for KG D6.

The government is adamant that it has the final say in gas pricing. RIL is unwilling to invest further in exploration and production (E&P) at the present price of $4.2 mBtu. The government revised the price to $5.6 per mBtu for other gas producers, but not for RIL. The apex court is yet to complete hearing on the matter. But muting the production at the KG D6 appears to be against national interest and, clearly, the government needs to find a way out of the mess.

RIL has invested some $10.5 billion for E&P in KG D6. The block needs an additional $7 billion to $8 billion for ramping up production but the company is reluctant to make this investment. Only two KG D6 fields, D1 and D3, produce gas but they will exhaust their reserves in three to four years. Already, production from these fields has been falling. At present, D1 and D3 produce 11 to 12 mscmd, compared with the peak of 60 mscmd in 2010. "The offshore fields at KG D6 are capital intensive for E&P activities. The success ratios are lower in this kind of geographies. In such a scenario, no exploration company will blindly invest without any cost recovery roadmap," says an RIL executive.

In addition to D1 and D3, RIL has three more fields at KG D6 - MJ1, Satellite and R-Series. RIL had plans to invest $3.18 billion in R-Series field alone for producing 13 to 15 mscmd of gas for 13 years. But the company has now refused to begin E&P from these reservoirs.

RIL'S revenue and EBIT (earnings before interest and taxes) from the E&P vertical was Rs17,250 crore and Rs 6,700 crore, respectively in 2010/11. The numbers fell to Rs 6,068 crore and Rs 1,626 crore in 2013/14 on the back of declining production at KG D6. But, statistically, the company has recovered most of its costs through the sale of gas and 30 per cent stake sale in its upstream assets to BP Plc at $7 billion in 2011. But cost recovery has still not been at the level defined in the PSC.

But why does the government fear the arbitration route since it's the shortest and the quickest way to reach a solution? Industry experts blame political compulsions for it - the government does not want to be seen as internally settling cases with the Ambani group though it is legally binding. "The government should clear its stand first rather than stretching the legal battle. If RIL is acting against the rule, the government has all the right to take back the assets and give it to another developer," sums up a natural resources analyst with an UK-based research agency.

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