RIL, BP drop gas price arbitration with govt
RIL and its partner BP Plc. have withdrawn an arbitration with the government on pricing of natural gas to facilitate further development of its offshore KG D6 block taking advantage of the prevailing low cost of oil field services in global markets.
The move will facilitate the companies to boost hydrocarbon production over the next few years and benefit from the higher price allowed for gas from difficult deep sea fields, while aiding the government’s strategic goal of lowering import dependence on hydrocarbons.
Withdrawal of arbitration is a pre-condition to RIL-BP being allowed higher price of gas produced from their allotted fields, according to the gas-pricing policy announced by the government on March 10, 2016.
“Yes. The ‘gas price’ arbitration has already been withdrawn,” BP said in response to an emailed query from
A second person privy to discussions between the consortium and the government, who spoke on condition of anonymity, confirmed the development and said “It is a pragmatic move. Cost of oil field services is low at this juncture and this is the best time to invest in developing deep sea discoveries.”
Mint had reported on April 11, 2016 that the consortium and the oil ministry initiated discussions to drop the arbitration. Disputes in the high risk and capital inten- sive hydrocarbon sector is common globally and companies work with national governments despite ongoing disputes.
According to the Union cabinet decision of March 10, 2016, if there is an arbitration or litigation filed by the firms directly pertaining to gas pricing, the new liberal pricing policy will apply only on the conclusion or withdrawal of such disputes.
To capitalise on the liberal pricing and free marketing regime, RIL and BP on June 15 announced their plan to invest ₹40,000 crore ($6 billion) to bring onstream a total 30-35 million cubic metres of gas a day over the 2020-2022 period.
The initial investment will go into developing ‘R-Series’ deep water gas fields in KGD6, in water-depths of more than 2,000 metres, approximately 70 km offshore.
RIL initiated arbitration in 2014 demanding implementation of the pricing formula developed by previous UPA government. Enforcing that formula would have doubled the price from the then prevailing $4.2 per million British thermal unit (mmBtu) from April 1, 2014.
However, the UPA government could not go ahead due to the model code of conduct ahead of the Lok Sabha election and the Modi administration subsequently modified the formula.
JP Morgan India Pvt. Ltd. said in a note on Friday that a per the new formula, the current ceiling price from deep water fields is $5.56/million British thermal unit on gross calorific value basis. State-run Oil and Natural Gas Corp. (ONGC) too announced a $5 billion investment in two fields in the KrishnaGodavari basin on March 29 last year after the government announced the liberal pricing for natural gas extracted from deepsea blocks.