RIL Serves Arbitration Notice to the Government; Demands Implementation of Revised Gas Prices

Reliance Industries on May 9, took a step similar to the telecom major Vodafone which served an arbitration notice on the government in the Rs. 23,800- crore tax dispute. RIL in conjunction with its partners BP and NIKO, issued a notice to the Government of India, demanding implementation of the revised price for gas produced from the Krishna- Godavari basin (KG-D6), off the Andhra Pradesh coast. This was ensure marker price for has as per the production sharing contract (PSC).

''The continuing delay on part of the Government of India in notifying the price in accordance with the approved formula for the gas to be sold has left the parties with no other option but to pursue this course of action. Without this clarity, the parties are unable to sanction planned investments of close to $4 billion this year,'' Reliance Industries said in a media release.

According to RIL, the debated price was not an 'arm's-length, market determined' price as per the PSC, however, it showed intent to move towards the desired arms-length price.

This is RIL's second arbitration notice on the issue of the KG-D6 gas field, the first one being in November 2011, served to the petroleum and natural gas ministry, over its move to prohibit certain expenditure incurred in the gas field, due to decreasing natural gas production. These proceedings are yet to begin, with the Supreme Court appointing the third arbitrator recently, after more than two year of legal power struggle. Read news about this dispute here.

The Domestic Natural Gas Pricing Guidelines, 2014 was issued on January 10, 2014, following which, the Rangrajan formula was approved by the government, doubling gas prices to $8.5 per unit from April 1. This formula was approved after nearly two years of debate by the cabinet. While most political parties and consumers condemned the change, RIL made an effort towards rescue, stating that the revised prices are still below the price of imported Liquefied Natural Gas (LNG).

In 2007, the Government fixed a price of $4.2 per unit for gas from the KG-D6 for the initial five years of production. The production started on April 1, 2009 and hence, the pricing policy expired on March 31, 2014.

The Rangrajan Committee, which submitted its report in December 2012, was appointed with an aim to look into the matters of PSCs and pricing of domestically produced natural gas. Rangrajan formula uses a long-term and spot liquid gas (LNG) import contracts as well as international trading standards for determining a competitive price for India. It would be applicable for five years. While the Rangarajan Panel suggested the revision of domestic gas prices on a monthly basis, the oil ministry changed it to a quarterly revision.

The Mukesh Ambani- led energy major RIL, along with BP and NIKO were planning a summative investment of $8-10 billion in the next few years in order to enhance production from the KGD6 block. They require clarity of pricing in order to facilitate this move. This domestic production is essential to meet India's energy needs and help to conserve foreign exchange which smoothens the process of importing natural gas to India.

"Most capriciously, there is no clarity on what the gas price would be in the future, failing which all our current and future investment plans are in jeopardy." The energy giant, which was getting ready to sanction the first major project with an investment of $4 bn in June/July 2014, is now forced to halt activities, the note added.

The Election Commission has prohibited the Government from declaring the new price until the Model election code of conduct is in force. This postponement of gas pricing on Election Commission's command is raising several conjectures as to the quantum of price rise and also the nature of implementation. In the light of the Bhartiya Janta Party taking lead in most opinion polls, concerns have been aggravated since it might explore a different pricing model if it comes into power.

In the meantime, the Government returned Rs. 509- crore bank guarantee submitted to Reliance Industries to get higher prices for gas produced from KGD6, stating that the new prices haven't been notified, adding that RIL will need to submit the surety when announced.

Gurudas Dasgupta, a veteran leader of Communist Party of India and the NGO, Common Cause has also filed writ petitions in the Supreme Court regarding the gas contract and pricing, as reported by Live Law earlier. During the hearing of the petition, Mr. Prashant Bhushan had raised grave allegations against Reliance, including charges of huge money laundering done by Reliance and Mr. Mukesh Ambani. According to him, this is despite the fact that Indian High Commission in Singapore had written to the Central Government as far back as on 31st August 2011 requesting for an investigation. An FIR had been filed by the Kejrival led AAP Government as well, alleging conspiracy to inflate gas prices, in response to which RIL had knocked the doors of the Delhi High Court, seeking the quashing of the FIR. With several petitions pending in the Courts of the country, the decision of the Government with regard to its implementation will come only after the deferment imposed by the Election Commission is lifted.

Read the Live Law Report  on Prashant Bhushan's demand for investigation on money transfer between reliance and Singapore Companies here

Read the Live Law Report  on Common Cause' petition against the move to amend the Production Sharing Contracts with reliance here

Read the Live Law Report  on Supreme Court Judgment Appointing International Arbitrator in RIL Case here

Read the Live Law Report on Reliance's petition before Delhi High Court to quash FIR filed by AAP Government here

Read the Press Release