After its successful production launch in April this year Reliance Industries (RIL) KG-D6 Block is now facing difficulties finding buyers for its gas, according to the Economic Times of India (see India: 2 April 2009: Reliance Industries Launches Gas Production from KG-D6 Block, Transforming India’s Energy Landscape). The problem is partially due to the unwillingness of state-run National Thermal Power Corp. (NTPC) to sign a gas sales and purchase agreement (GSPA) with RIL. NTPC is opposed to paying the US$0.12/mmBtu marketing margin for its 2.67-mmcm/d share of KG-D6 output and wants changes in penalty clauses to make RIL liable for defaults. Indeed, the default clause has meant the Kawas and Gandhar plants run by NTPC have not yet signed a GSPA despite RIL winning a tender for gas supplies to them in 2004. As NTPC had a stake in the Dabhol facility, its opposition also delayed a separate GSPA agreement with the power plant for 2.7 mmcm/d.
NTPC had also reportedly been reluctant to sign binding GSPA’s before hearing the outcome of the legal dispute between RIL and Reliance Natural Resources Ltd. (RNRL) over the price of gas from the block. In a victory for RNRL the court asked both parties to enter into an agreement within a month under which RIL will supply 28 mmcm/d for 17 years at US$2.34/mmBtu— probably mostly to RNRL’s Dadri power plant in Uttar Pradesh. The verdict will mean losses for RIL. Indeed, the US$2.34/mmBtu price is barely above the US$2/mmBtu price at which Oil & Natural Gas Corp. (ONGC) sells gas in India, a price estimated to have caused the state-run company losses of US$632 million in 2008/09. The pricing verdict might now encourage NTPC to harden its position on marketing margins for KG-D6 gas, having realised that it may not necessarily be bound to the government approved price of US$4.2/mmBtu. RIL is reluctant to change terms for NTPC given that uniform GSPA’s have been negotiated with a host of fertiliser and power producers. Changing terms for NTPC could further threaten the pricing structure for KG-D6 gas, which RIL is extremely keen to uphold as price reductions could entail selling gas at a loss in the domestic market, threatening project returns.
RIL is also facing potential problems in finding takers among fertiliser units, which were previously allocated a sizeable 15 mmcm/d from the KG-D6 Basin (see India: 30 March 2009: Reliance Industries Signs Deals with Fertiliser Firms for KG-D6 Gas). Fertiliser units are now only using 75—80% of that quota, partially due to the annual shutdown of two plants but more seriously because of a surge in gas sold under the APM. Indeed, Gas Authority of India Ltd. (GAIL) may have stepped up gas sold under the APM in response to the launch of output from the KG-D6 Block. APM gas is priced at US$2/mmBtu, significantly undercutting the price of gas from KG-D6 sold at US$4.2/mmBtu, and threatening RIL’s market position. Indeed, fertiliser units are now taking APM gas first, which is contributing to RIL’s difficulties. According to an unidentified RIL official: “we can produce 40mmcm/d, but we are forced to produce only 26 mmcm/d because of underutilisation”.
Outlook and Implications
RIL has now approached the Petroleum Ministry over gas distribution problems and a meeting is due on 19 June between RIL, and the petroleum, power, and fertiliser ministries in order to address utilisation problems with KG-D6 gas. There is likely to be demand for KG-D6 gas from outside the fertiliser and power sectors as India’s gas market remains relatively supply constrained, although generally not from the petrochemical industry, given that KG-D6 gas has a relatively low calorific value and is therefore not well suited to the industry. However, the question is whether the Empowered Group of Ministers (EGOM), will agree to RIL selling gas to other users at this stage. In the past the EGOM has been keen to direct gas to priority sectors and resisted attempts by RIL to market gas more broadly until certain production thresholds had been reached. However, rather than reworking the marketing framework and opening up further gas pricing negotiations to a host of other potential consumers at this stage, the EGOM is probably keener to resolve outstanding issues with priority consumers in the fertiliser and power sectors—supply of which is a priority for the government. This could entail further negotiations on marketing margins with NTPC while encouraging the commencement of gas supplies to Dabhol, which has signed the GSPA but not yet started sourcing gas from KG-D6. The Petroleum Ministry however could be more keen for a resolution of the marketing problems due to the potential impact on investor interest in the eighth round of the NELP, due to resume shortly.
In any case, the chances of RIL losing significant amounts of money from the difficulties in marketing gas are perhaps not as great as they first appear. Many of RIL’s contracts have take-or-pay clauses, under which consumers have to pay for contracted gas supplies even it they do not take deliveries. Therefore RIL still stands to make revenue even if some companies are over-contracted. Indeed, this might encourage some fertiliser companies to continue taking RIL’s gas despite the greater competitiveness of APM—otherwise they could end up paying double. However, unless demand for KG-D6 gas picks up the marketing problems might cause RIL to push back its production schedule for the block, which is currently estimated to hit peak production of 80 mmcm/d in 2010 to 2011.
