Government Appoints Ministerial Panel As RIL, Essar CBM Price Differ

NEW DELHI: The oil ministry plans to take coal bed methane (CBM) pricing matters to a ministerial panel as it sees a wide gap between prices offered by customers to Reliance Industries and Essar, a move that can further delay approvals, government and industry officials said.
“Reliance CBM price is about three times more than that of Essar. The ministry is in a fix due to the wide variation even though both companies have followed laid down rules. There is a view that the issue should be placed before the EGoM on gas pricing or the cabinet,” said a government official who did not wish to be identified.
Industry and government officials say prices from two different producers can vary because CBM quantities are relatively small compared to natural gas produced from Nelp blocks such as Reliance-operated D6. “CBM blocks are located in interiors and transportation of gas is not easy. Hence there are regional price variations and such variations are common worldwide,” officials said.
Essar, following an open bidding process in August last year, discovered that price for bulk of its Raniganj (East) CBM was $4.2 per mmBtu, while Reliance’s followed a similar exercise in February for its two blocks in Madhya Pradesh and discovered CBM price in range of over $10 per mmBtu, officials in the Directorate general of Hydrocarbons (DGH) said.
According to CBM contracts between energy firms and the government, the oil ministry is expected to approve CBM pricing in 60 days of application, but it could not take any decision despite within the deadline.
Even in the case of Essar, some potential customers offered a price as high as $14 per unit, but their requirement was negligible compared to state-run Gail India’s bid, which offered $4.2 per unit rate for almost entire output, officials said.
Oil ministry officials say they are concerned about how the CAG may react to the lower price from Essar as it would lead to lesser revenue to the exchequer, while Reliance’s higher price would be opposed by power and fertilizer firms. States get 10% royalty and 13% value added tax in CBM while the center gets 12.5% production-linked payment and 2% central sales tax.
The oil ministry is empowered to approve formula/basis for discovering market-linked CBM rates unlike pricing of domestically produced natural gas from New Exploration Licensing policy blocks, where price is determined by an empowered group of ministers (EGoM), officials said.
DGH officials examining the pricing matters of Reliance and Essar say that both companies followed CBM contracts and petroleum ministry’s rules to discover their prices of their respective CBM blocks.
“They invited bids through public announcements. Their bids were at arms-length barring few entities, which were rejected and they considered bids of significant off-takers, as consumers requiring gas in small quantities would be willing to pay very high prices,” one official with direct knowledge of the mater said.
“DGH has examined CBM pricing mechanisms of the two operators and recommended that they discovered market prices,” the official said. Stung by CAG and CVC, the over-cautious oil ministry took DGH’s opinion in the matter, which was not required.