RIL takes aim at gas pricing formula

Mukesh Ambani’s Reliance Industries (RIL) has fired a salvo at the government expressing displeasure over the pricing mechanism for domestic natural gas.

In its annual report, the company said, “In RIL’s view, the methodology used for valuation of gas under these guidelines, does not reflect true arms- length market price…as required under the production sharing contract (PSC) signed with the government. Without prejudice to any of its rights and contentions, RIL is complying with the guidelines.” The government had notified the New Domestic Natural Gas Price Guidelines on October 18, 2014.

Under the Narendra Modi-led government, natural gas is priced uniformly at a notified rate derived from a six-month trailing average of a basket of gas benchmarks. The rate for April-September 2016 is $3.06 for every million British thermal unit.

The new pricing formula was cleared by the Cabinet Committee on Economic Affairs (CCEA) in October 2013, based on the recommendation of the Rangarajan Committee. Following continued delay by the government in notifying the price in accordance with the approved formula, RIL, BP and Niko had issued a notice of arbitration on May 9, 2014, seeking a declaration that the contractor has the right to sell gas produced from Krishna-Godavari (KG) D6 Block at approved competitively determined, arm’s-length prices.

RIL and the government have nominated their arbitrators, who have not been able to agree upon a presiding arbitrator. The three private companies have filed an application for appointment of the presiding arbitrator before the Supreme Court, which is pending.

The new formula was based on a weighted average of prices in countries such as the US, Russia and Canada. The decision led to a 33 per cent rise in prices between November 2014 and March 2015 to $5.61 a unit from the then $4.2 a unit on a net calorific value (NCV) basis. On a gross calorific value (GCV) basis, these went up from $3.79 to $5.05 a unit.

Later, the government announced a seven per cent cut to $4.66 a unit on GCV for the six months between April and September 2015.

Reliance Industries Limited (RIL)