Freedom redefined
Deepak Mahurkar
Deepak Mahurkar
E&P companies, especially those with gas interests in India, were closely following the legal tussle between RNRL and RIL. They were anxious to see how the apex court views the decision of the Government to get involved in pricing as well as utilization of gas produced from NELP blocks, despite being promised freedom under the production sharing contract (PSC). Also on test was the strength of the Ambani family MoU which served as the guiding document for the group demerger scheme.
While the apex court did not recognize the family MoU as a legally binding document, the Government’s sovereign right of ownership on natural gas resources in the country received sanction of the court, thus empowering the Government to decide, in nation’s interest, as to who gets gas, in what quantity and at what price.
This decision may be a sweet victory for the ‘respondent’ RIL but it is a bitter pill for an ‘E&P investor’ RIL. The verdict effectively means that until a transparent gas pricing policy is in place, for every additional gas field brought to commercialization by RIL or any other company, it has to knock the doors of the Government to nominate off-takers and to approve price formula. It took long time to get these approvals for the first NELP field to come to commercialization.
If that is any indication, the process of conducting transparent gas price discovery and then proving that it is at arm’s length can potentially get long, and does not assure any level of price. Also the prices thus decided are subject to revision. In case of KG-D6, the EGoM decided to review the price basis and formula after five years.
Notwithstanding, the formula approved for the KG-D6 block and the final price accruing to RIL was not disappointing. The price is linked to crude oil price, allows a cap of a reasonable $60 per bbl crude price, and promises a review after five years presumably to reflect the market. Most importantly, it offers stability of price for a term of five years.
Therefore, investors who are able to take risk of uncertainty and draw comfort through legacy of NELP KG-D6 pricing, will invest. Others, and typically the global majors who have option to invest in other regimes, may look for other compelling reasons to invest in India.
The Government will have to assure international investors and established Indian E&P companies of its intents to suitably reward. The best way to do so would be by laying down transparent gas pricing policy. As the Hon’ble Supreme Court ruling comments, “it is high time it (GoI) frames a comprehensive policy/suitable legislation with regard to energy security of India and supply of natural gas under production sharing contracts”.
The last but not least by any perspective, is the emphasis made by the Hon’ble Supreme Court on the balancing of interests of shareholders of both RIL and RNRL. RIL has been directed to initiate re-negotiation of the Gas Sales & Master Agreement (GSMA) with RNRL, although-
- Gas price is non-negotiable;
- Contract term will be determined based on PSC terms;
- Current allocations may remain unchanged; the Government will need to alter them to offer gas quantity set out in the MOU;
- RNRL will need to observe the same procedures as laid down by the Government for allocation of gas from RIL’s KG-D6 field, like any other project developer in the country; and
- Family MoU is to be taken into account during negotiations.
Therefore, another chapter in the RIL-RNRL gas dispute opens with the start of re-negotiation since it will be a tight-rope walk to balance the interest of RNRL shareholders should gas supply not get contracted given little flexibility on the pricing, term and allocation aspects.
For the gas consumers, there will be no change in the way gas industry is running today. KG-D6 gas price and allocation remain as they are and will be revised periodically as per policies of the Government.
We now await announcement of the next NELP round hopefully with candid removal of pricing and marketing freedom clauses from MPSC.
(Views expressed are personal)
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