RIL to Give a Bank Guarantee of $120-135 million

Mukesh Ambani’s Reliance Industries Limited (RIL) along with BP and Niko, key partners in the KG-D6 block, is expected to announce a bank guarantee of $120-135 million (Rupees 750-850 crore) to get the benefits of higher gas price. This estimate is based on the proper formula devised by the Rangarajan Committee. As of now though, there has been no official communication from the Oil Ministry.

B. Ganguly, President and COO of RIL’s Business Operations Explorations and Production was quoted as saying, “What we understand is that the bank guarantee will be based on the actual daily output of the D-1 and D-3 fields (the producing fields in the D6 block off the Andhra Pradesh coast) multiplied by the difference between the new and the existing gas prices and the number of days of production.” He added that once RIL (and its partners) agreed to the bank guarantee calculations and the process of furnishing them the implementation side of things wouldn’t take too long.

This whole situation surrounding the new formula came to light after RIL sought permission to increase gas prices. At the time of notifying the new gas pricing policy, the government proposed that RIL could benefit from the price rise if RIL submitted a bank guarantee. The new price is likely to be almost double the current price of $4.2 a unit at the landfall point (gas is measured in million British thermal units), which RIL gets for the D6 block. This price also includes charges such as those of transportation, infrastructure and other local and State taxes.

The Oil Ministry has proposed to calculate the new gas price based on the average of the last four quarters. M. Veerappa Moily, The Petroleum and Natural Gas Minister has commented that the finalization of the bank guarantee submission would be done by February 10. What remains unclear is how RIL plans to pay this guarantee – as a lump sum amount or in the form of quarterly payments.

This whole story comes on the back of RIL finally increasing output from the Dhirubhai Wells (D1 & D3) in the KG-D6 block. The shortfall during the low period was close to one trillion cubic feet. Analysts expected production to reach 80mmscmd after 9-12 months of production. Output from the D-1, D-3 fields in the block started in April 2009. After hitting a peak of 60-61 mmscmd in early 2010, the output started to drop. The current production volume is 13 million standard cubic metres a day (mmscmd) and is likely to be maintained at this level or a little higher at 14-15 mmscmd during the fiscal.

It is expected that RIL along with Niko will begin the supply and sales related discussions with customers once the pricing issue is resolved. The agreements of sale that are owned by the aforementioned companies expire at the end of March. At the same time, they have over 50 agreements, of which 16 are live and with fertilizer companies.

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