Natural Gas Decision in India at $2.34/mmBTU

The Bombay High Court ruling on natural gas supply from the Krishna-Godavari basin appears to have upheld contractual obligations on the part of
Reliance Industries Ltd (RIL) to Reliance Natural Resources Ltd (RNRL), now de-merged corporate entities. The court order calls on RIL to supply 28 mmscmd of gas at $2.34 per mmBtu over a 17-year period.

Yet the ruling hinges on a mere technicality. As per para 317 of the order, the ‘agreed price’ is governed by another contested contract, that between RIL and NTPC, the power major. The court has held that it ‘would not like to impinge on the merits of the suit pending between NTPC and RIL...’ and the former’s right to 12 mmscmd of gas at a price of $2.34 per unit. Note also that the contention of RNRL in the ‘marathon hearing’ has been that the NTPC price, which was supposed to have been arrived at on the basis of competitive bidding, can be deemed reasonable.

But then, according to the production sharing contract (PSC), when it comes to valuation of gas, just about two clauses seem to contain the mechanics of determining the price. As per article 21.6.2 (b) of the PSC, gas which is sold to the government or its nominee “shall be valued on the terms and conditions actually obtained including pricing formula and delivery”. And clause (c) adds that gas which is sold or disposed of otherwise...”shall be valued on the basis of competitive arms-length sales in the region for similar sales under similar conditions”. And the fact of the matter is that the admissibility of the NTPC contract price and its validity for supply to RNRL remains to be tested in a court of law.

Meanwhile, the Centre — the sovereign is the licenser and owner of all natural resources — has of late worked out the price of K-G basin gas at $4.20 per mmBtu. Now para 320 of the ruling does suggest that “even at” $2.34 per mmBtu price, “RIL makes a profit”. But should the profitability criteria be used to judge price? What’s clearly required is better scope for price discovery in the rather fledgling national market for gas. A stand-alone gas Act is required as well. There’s also an immediate policy issue involved. A clutch of fertiliser producers now have agreements with RIL to source gas at $4.2/unit and these new contracts ought surely to be honoured.