The empowered group of ministers (EGoM) has approved a pricing formula for RIL’s gas from the Krishna-Godavari (KG) basin, modifying the original formula. The revised formula lowers the proposed price of the gas at Kakinada to $ 4.20 per unit as compared to $ 4.33. The price at which RIL will sell its gas from the KG basin to consumers will be valid for five years, after which it will be open for revision, reported ET. RIL will not be required to call for fresh bids. The EGOM has decided that the decision taken at Wednesday’s meeting will be without prejudice to the ongoing legal cases between RIL and Reliance Natural Resources and between RIL and NTPC as they are sub-judice. It remains to be seen as to how the outcome of the court cases impacts RIL’s plans to convert the bids into binding gas sales agreement and begin production by June 2008. An interim stay by the Bombay High Court prevents RIL from allocating gas up to 80 million standard cubic metres to any third party.

The EGoM has said all future contracts under the New Exploration and Licensing Policy will have a floor price of $ 2.5 per million British thermal units (mmBtu) and gas producers will have to get the pricing formula approved before calling for bids from consumers.

A pre-approved formula will ensure that disputes over gas prices would be avoided in future. The EGoM has also reinforced the government’s commitments to all oil and gas companies by stating that all production sharing contracts will be honoured. Also, in a clear signal that market prices would be the order of the day, the EGoM has clearly said all sectors would pay uniform prices. This means there will not be any upfront subsidies to controlled industries like fertiliser and power. Consumers from these sectors led by their administrative ministries had been arguing for lower gas prices given the fact that they have to sell at regulated prices.

Revisions in the formula have been introduced to reduce volatalities linked to exchange rate and crude prices. Further, in a bid to make the bidding process transparent, the EGoM has done away with the premium in the price which was bid by consumers under RIL’s formula. RIL had proposed the value of “c”, a biddable element in the formula, at 4 taking an average of the bids received.

Some consumers like fertiliser companies had bid a premium at 1, while others like power companies had bid at even 8. The formula put forward by RIL had four elements — a base price, a biddable premium, a link to Brent crude prices and the rupee-dollar exchange rate. The revised formula has done away with the premium while capping the crude price at $ 60 a barrel as against $ 65 proposed by RIL.

Also, the base price has been lowered to Rs 102.5 instead of Rs 112.5 and the exchange rate has been taken at Rs 41 to the dollar instead of Rs 45. The changes in the pricing formula will lead to a price of Rs 172.39, a reduction of over Rs 15 per unit.