RIL/RNRL/NTPC: Product Sharing Contract

Underline the MOU sentence where the price is subject to Govt. approval? Or in the PSC?

Page 308 and point number 316 of the Court order says “as far as the price factor is concerned, the price at which the assured supply of gas is required to be supplied to REL for all its projects including for all its affiliates would be subject to and under the terms of Production Sharing Contract”

Article 21.6.3 of Production Sharing Contract (PSC) emphasizes that “the formula or basis on which the prices shall be determined …… shall be approved by the Government prior to the sale of natural gas to the consumers/buyers”

Volume is not a problem.80 by July 31 and 120 by March 31.

RIL has never submitted any such development program which states that peak production level is to reach at 120 mmscmd. With current estimates, plateau production is only of 80 mmscmd which could be reached by the year end provided there are enough off-takers of the gas.

The NTPC price bid was a clean price for supply of gas.

Price was always a subject of Government approval as per Article 21.6.3 of Production Sharing Contract (PSC), whether it is for NTPC, REL or any other consumer.

The RNRL agreement/MoU refers to the draft agreement with NTPC. Which is at $2.34.even if the price is changed by the Government now, the basis for RNRL agreement which is the draft agreement is unaffected.

Prima facie, agreement with NTPC was not a “concluded contract”. Secondly, as said earlier, price quoted to NTPC was a matter of Government approval. As far RNRL price is concerned, the price was rejected by the Government as it did not meet the “arms-length” criteria.

Nothing in the PSC says that the sale price and valuation price cannot be different.

It is mentioned in Article 21.6.3 of PSC that “the formula or basis on which the prices shall be determined …… shall be approved by the Government prior to the sale of natural gas to the consumers/buyers”. It clearly depicts that the approved price should be used for valuation as well as the sale of gas.

If NTPC price is approved by the Government at $2.34, they will also approve valuation at $2.34.

As per the PSC, the valuation should be done on the basis of Government approved formula/price. According to Government approved formula, the price of KG D-6 gas should be $4.2 per mmbtu. Therefore, Argument of valuating at $2.34 per mmbtu itself nullifies. As far NTPC price is concerned, it has never been approved by the Government.

The earliest that they expect gas to be available to RNRL is in June/July 2012. They expect 6 months for Supreme Court decision and then 2.5-3 years to start commissioning power plants.

A power plant of such large scale takes at least 5-6 years of commissioning.

They will not sign EPC contracts or place any orders until gas supply agreement is in place.

As the matter is in Supreme Court now, we would not comment on the subject

Government will never get 85% share in gas output as RIL will continue increasing capex.

RIL has already submitted its Field Development Program according to which the development cost of the field is $8.8 billion. This expenditure has already been approved by the Directorate General of Hydrocarbon (DGH). Government has also approved the price which would be the basis for valuation of the field. As soon as RIL recovers 2.5x of its total investment, the Government’s share will reach to 85%. As far as the cost escalation is concerned, development cost of about $5 per barrel oil equivalent (boe) of RIL is still less than half of world average of $10-12 per boe. RIL’s cost escalation from the initial development program is still comparable to that of Cairn’s which increased by 2.5 times within three-year time period.

The rejection of the RIL/RNRL contract in July 2006 by Government was a rejection of the valuation price and not of sale price or that of a valid commercial contract existed.

As per the PSC, valuation and sale price are same. Government rejected the price at which the gas was to be supplied to RNRL because it did not meet the “arms-length” pricing criteria of the PSC. As far RIL-RNRL agreement is concerned, it is not a commercial contract but a family arrangement (MoU).

Power plants cannot afford $4.20 + transportation charges as it leads to cost of power being uncompetitive to coal.

Gas can not compete with domestic coal in power generation as the domestic coal is cheaper than gas. However, as far as affordability of power plats are concerned, NTPC has procured gas from spot market at over $20/mmbtu to generate power. Therefore, gas price of $4.2 per mmbtu is comfortably competitive for power generation.