CCEA Directs RIL, BP To Furnish USD 1.2 bn Bank Guarantee For Higher Gas Rates

(Source: PTI)

Reliance Industries and its partners, BP Plc of UK and Canada's Niko Resources may have to provide a maximum of USD 1.2 billion bank guarantees over 3 years to get nearly double the rate for natural gas being produced from the main fields in the KG-D6 block.

On December 20, the Cabinet Committee on Economic Affairs (CCEA) had decided to allow RIL to almost double the price of natural gas from April 2014, provided that the firm furnishes a bank guarantee to cover its liability if the gas-hoarding charges are proved. Sources said that 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.

Considering that gas prices will rise from USD 4.2 per million British thermal unit (mmbtu) to USD 8.2-8.4 after the Rangarajan pricing formula comes into effect from the next fiscal, the bank guarantee - being the difference of the current and new price - for every trillion cubic feet of gas production will work out to USD 4 billion.

Sources said that the bank guarantee for the entire remaining recoverable gas reserves of about 0.75 Tcf in D1&D3 fields comes to USD 3 billion. At the current rate of production of about 8 million standard cubic meters per day, D1&D3 will produce about 0.3 Tcf in the next 3 years - the time that may be needed to settle the issue of gas hoarding charges. The bank guarantee for 0.3 Tcf comes to USD 1.2 billion, they said. Of this, the share of RIL, which holds 60% stake in KG-D6, will come to USD 60 million per quarter. BP has 30% interest and the remaining 10% is with Niko.

D1&D3, the first of the 19 discoveries in eastern offshore KG-D6 block that was put on production in April 2009, was originally estimated to hold 10.03 Tcf of reserves. But last year, this was slashed to 2.9 Tcf based on production data for the first 3 years, when wells were shut one after another following water and sand sweeping inside along with a sharp drop in reservoir pressure.

Of the re-stated reserves of 2.9 Tcf, about 2.2 Tcf have already been produced in the first 4.5 years and the balance of about 0.75 Tcf remains to be produced. Sources said that the new rate will apply to all other fields in KG-D6 without any preconditions. The currently producing MA oil and gas, fields like R-Series and satellite discoveries that will come into production in 2016-17 will also get the new rates.

The government has already imposed a penalty of USD 1.78 billion on RIL and its partners for producing less than its stated targets in the past 3 years. The bank guarantee comes as an addition to this. While RIL blames unforeseen geological complexities for production not matching the pre-stated targets for D1&D3, the Petroleum Ministry and its technical arm DGH hold the company responsible for not drilling the committed number of wells, which has resulted in a fall in output. With both sides not budging from their respective position, the issue has been referred to arbitration, which may take anywhere between 2-3 years to arrive at a final verdict.