Reliance Industries and BP suspends gas auction after cap on traders' margin

The consortium of Reliance Industries and BP has suspended the planned auction of gas produced from its KG-D6 block after the government capped traders' margin on the resale of such gas.

"It is hereby notified that the current bidding process is suspended till further notice," the consortium said on Monday, without giving any reason.

A person aware of the matter said the partners need more clarity on the latest government order on gas sales, especially since it affects the way gas can be auctioned as well as the business prospects of RIL-BP's gas trading affiliate. A joint venture company of Reliance and BP has been an important trader of KG-D6 gas.


The auction was slated for January 24, after being deferred twice, to sell 6 million metric standard cubic meters a day (mmscmd) natural gas for the next five years from the KG block.

The consortium had already eased some of the bidding criteria following pushback from potential bidders, dropping a contentious pricing condition that turned the price ceiling into a floor rate for buyers, cutting the floor price, and easing eligibility criteria linked to bidders' net worth and past gas procurement.

The government last week made it mandatory for bidders to specify if the gas purchased in the auction from difficult fields such as the KG-D6 block will be self-consumed or resold. It capped the traders' margins on the resale of such gas. If price bids are tied, city gas companies and fertiliser firms would now get a preference over other sectors in the distribution of the gas, which until now were allotted in proportion to the volumes bid for.

The government move came following complaints that traders were buying gas from difficult fields at or below the ceiling price and selling at a great margin to end customers, defeating the core purpose of consumer affordability.

Some potential bidders also complained about some of the eligibility criteria as well as pricing terms in the RIL-BP's planned auction, which has now been suspended. In response, RIL-BP changed several bidding terms.

The original gas sale and purchase agreement (GSPA) of RIL-BP provided for the buyer to pay a price that is higher among the government-set price ceiling for difficult gas, the official formula price for domestic gas, and the benchmark-linked price discovered in the auction. This condition could effectively turn the ceiling into a floor price for buyers, contrary to the government's intent behind imposing a ceiling, as per some executives at gas consumers.