Ambani one step closer to achieving gas pricing goals

Is the UPA government finally moving to accommodate Mukesh Ambani on gas prices?

On Friday, Prime Minister Manmohan Singh told a Delhi seminar: “We are conscious that remunerative energy prices are needed to ensure expanded energy supply.”

The PM’s statement, which has been duly hedged with ifs and buts about government regulatory oversight and working out a “win-win situation for investors as well as the people of India,” comes just weeks before the 90-day ultimatum issued by Reliance Industries seeking an “amicable settlement” to the pricing of Krishna-Godavari gas is about to end.

[caption id=“attachment_254448” align=“alignleft” width=“380” caption=“The Reliance fight is not, however, only about KG gas. AFP”]  [/caption]

Ambani says the government-fixed price of $4.2 per mmbtu (million metric British thermal units) is unfair when gas is being imported at prices that go upto $17 per mmbtu.

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In its January ultimatum, Reliance said: “We wish to exercise our contractual right to market natural gas on the basis of arm’s length competitive sales to the benefit of all parties, including the government.We propose discussing with you a revised price formula consistent with Article 21.6 of the PSC (production sharing contract) and with a view to reaching an amicable settlement within 90 days of the date of this letter.” The deadline ends by the second week of April.

The Reliance fight is not, however, only about KG gas, where output has been falling for reasons that are said to be technical but which may not be unconnected to pricing (Read this story ).

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The company is also fighting the regulator, the Directorate General of Hydrocarbon (DGH), over the pricing of coal-bed methane (CBM) gas. Reliance has two CBM blocks in Madhya Pradesh and Chhattisgarh.

As _Firstpost_ reported in January, Reliance has told DGH that is cannot set prices based on the latter’s hand-picked customers’ needs. In a letter, it said: “While the government may wish to facilitate supply of gas to some sectors, the approval powers of the government cannot be used to suppress prices of CBM gas below what the market can fetch by restricting price discovery itself. Use of its powers of approval (of the basis/formula of pricing) cannot be used by the government to facilitate the administration of subsidies through preferential pricing to chosen sectors.”

To be sure, it is highly unlikely - despite the PM’s statement - that the government will free KG basin prices immediately, despite the 90-day ultimatum sent by the company for arbitration. BusinessLine speculates that the changes will first impact CBM gas, and not Krishna-Godavari. It says: “The government is likely to decide by April-end on the price of gas that Reliance Industries and Essar Oil plan to produce from coal seams. However, there is unlikely to be any revision in gas price from Reliance Industries-operated KG-D6 block immediately.”

The KG gas price of $4.2 mmbtu is supposed to be fixed till 2014, but Reliance has been unwilling to accept it as reasonable and is demanding a new formula.

The PM began the process of finding ways to meet the gas industry’s demand for freer pricing last month when he wrote to Petroleum Secretary GC Chaturvedi to “consider obtaining legal opinion on the matter (of revising prices) and place it before the EGoM (empowered group of ministers) on gas.” The EGoM is scheduled to meet this month.

Willy-nilly, pushed by serious problems in the entire energy sector, the government seems to be moving to meet Ambani at least half-way.