Oil Ministry seeks legal opinion on RIL bank guarantee

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The Oil Ministry has sought legal opinion on whether bank guarantees to cover the increase in gas prices from April need to be furnished by Reliance Industries alone or by partners BP and Niko Resources as well.

The ministry had previously felt that since charges of gas hoarding had been levelled against RIL, the company alone should submit bank sureties equivalent to the incremental price that the consortium would get the output from KG-D6.

RIL had represented against this, saying it owns only 60 percent of KG-D6 and would get a proportionate share of the incremental revenue, sources privy to the development said. BP Plc of UK has a 30 per cent interest in the eastern offshore KG-D6 block and the remaining 10 per cent is with Niko Resources of Canada.

Also read: IOC stake sale likely next week 

Sources said the Oil Ministry has now sought the Law Ministry's opinion on which of these companies should provide the bank guarantees and how they should be submitted. The new rates for gas, starting from April 1, are based on the average of global benchmarks and LNG import prices and will apply to production by private and state-owned companies.

While production of gas at KG-D6 has declined, the government agreed in December to allow RIL to charge higher prices provided the company furnished bank guarantees to settle any claim against it over the shortfall in output. The bank guarantee, equivalent to the incremental revenue that the KG-D6 consortium would get from the new gas price, would be encashed if it is proved that RIL hoarded gas ordeliberately suppressed production at the main Dhirubhai-1 and 3 (D1&D3) fields in the KG-D6 block since 2010-11.

Sources said considering that gas prices will rise from USD 4.2 per million British thermal units to USD 8.2-8.4 after the Rangarajan pricing formula comes into effect in April, the bank guarantee -- covering the difference between the current and new prices -- for every trillion cubic feet (tcf) of gas produced would be USD 4 billion.

The surety for the remaining recoverable gas reserves of about 0.75 tcf in the D1&D3 fields comes to USD 3 billion. At the current rate of production of about 8 million standard cubic meters a day, D1&D3 will produce about 0.3 tcf over the next three years - the time that may be needed to settle the gas hoarding charges.

The bank guarantee for 0.3 tcf of gas comes to USD 1.2 billion, they said. RIL's share of the surety would work out to about USD 60 million per quarter.