The Cabinet on Thursday decided to allow Reliance Industries to almost double the price of natural gas from April provided the firm gave a bank guarantee to cover its liability if gas-hoarding charges are proved.
The bank guarantee, which will be equivalent to the incremental revenue that RIL will get from the new gas price, will be encashed if it is proved that the company hoarded gas or deliberately suppressed production at the main Dhirubhai-1 and 3 (D1&D3) fields in the eastern offshore KG-D6 block since 2010-11, sources said.
Prodded by the Finance ministry, the Oil ministry had initially proposed to deny the new gas prices that will kick in from next fiscal till such time that RIL either made up for the shortfall in output during past three fiscals, or it is proved that the company was not responsible for production falling below targets.
The issue had held up notification of the new gas pricing formula that will be applicable to all producers - public and private - and all forms of gas-conventional and unconventional forms like coal-bed methane and shale gas.
As a way out, it was proposed that RIL and its partners BP Plc of UK and Canada's Niko Resources be asked to give bank guarantees for the incremental revenue they will get till the hoarding issue is resolved through arbitration and validation by independent international experts.
The government in June approved the Rangarajan formula for pricing of all domestically produced natural gas at an average of global gas hub rates and price at which India imports LNG (gas in liquid form).
The rate in April 2014, when the new pricing is to be implemented, will be about $8.4 per million British thermal units as against the current $4.2.
The Finance Ministry, however, wanted certain changes in the approved formula by excluding liquefied natural gas (LNG) purchases from the spot market, which it said was highly volatile. After excluding spot purchases, the new gas price should be $8.1.
Prices of natural gas, which is an input to manufacturing fertiliser and electricity generation, will be revised every quarter based on the average of the past four quarters, with a gap of one quarter.
In the run up to the Cabinet decision, the Finance Ministry sought to know if government position on reasons for fall in gas output at KG-D6 will be diluted by accepting bank guarantee.
In the arbitration, RIL is countering the government's stand that non-drilling of committed wells led to an 80 per cent fall in output by citing geological complexities and lower than anticipated reserves. The arbitration may linger for an indefinite period, the Finance Ministry feels.
It was of the view that the bank guarantee in that case may run into about $9 billion which needs to be monitored.
It also wanted to know the proposed course of action in case RIL does not comply with bank guarantees.