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Pressure Points

  • It seems there is no end to Reliance Industries Ltd's run-ins with the petroleum ministry, the latest being a tug-of-war over the price of coal bed methane (CBM), a natural gas contained in coal. India, which has the world's third largest coal reserves, is estimated to hold around 4.6 trillion cubic metre of this gas.In August 2011, the ministry came out with a set of guidelines  requiring coal gas drilling companies to first offer the gas to priority sector industries, such as fertilisers and steel, at pre-determined prices before selling the gas in the market. RIL, which owns the Sohagpur east and west blocks in Madhya Pradesh, however, shot off a letter to the ministry alleging that such a stipulation was not there when contracts were given.
  • “When customers are pre-identified, there will not be an incentive for them to quote better price,” said the letter. “It is surprising why the government is suppressing CBM price discovery. A good price would ensure better and increased royalty to the government. So, they should be all the more supportive of a free and competitive pricing,” said an RIL spokesperson.Experts say that the guidelines will impact all operators. “It is unfair to make operators sell gas at a price dictated by limited industries when affordability of higher price exists in the economy,” said Deepak Mahurkar, associate director, oil & gas industry practice at PricewaterhouseCoopers. “The incumbents can be forced, but new investors will be dissuaded.”
  • The ministry, however, says the empowered group of ministers, which decided on commercial utilisation of natural gas, had also indicated sectors which should be given priority for receiving the gas. “The purpose of the guidelines is to keep provisions of contract intact,” said a senior official. “We have not stopped anybody from selling it to private customers but the need of priority sectors has to be met first.” RIL alleges that the government is subsidising priority consumers through preferential pricing. “Use of its powers of approval cannot be used by the government to facilitate the administration of subsidies through preferential pricing to chosen sectors,” says the letter. The ministry has not yet responded to the letter.
  • According to the petroleum ministry, a variety of sectors crucial to the economy are suffering from gas shortage, more so because of the falling output from Reliance's KG-D6 basin in Andhra Pradesh. Last year, supplies to several steel companies were cut by 80 per cent and fertiliser manufacturers are setting up plants overseas to tide over the shortage. The ministry also alleges that RIL fixed the Sohagpur gas price too high, at $13 per million metric British thermal unit (MMBtu), whereas Great Eastern Energy Corporation has been selling gas from its Raniganj blocks in West Bengal at $6.79 per MMBtu since 2007. Domestically produced natural gas is priced at $4.2 to $5.73 per MMBtu and the natural gas RIL produces from its eastern offshore KG-D6 fields is priced at $4.205 per MMBtu.
  • RIL claims to have fixed the CBM prices based on the selling price of liquefied natural gas fixed by Petronet, which is owned by the public sector companies ONGC, IOC, BPCL and GAIL. “If buyers are willing to pay $13 for LNG, they can pay the same price for CBM as well,” said Bhavesh Chauhan, analyst at Angel Broking. But there are others who believe that LNG pricing cannot be applied for CBM as huge investment goes into liquefying natural gas.

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