RIL gas may not flow into market by June

NEW DELHI: The empowered group of ministers’ (eGoM) likely approval of Reliance Industries’ (RIL) gas formula may be a big step forward in the resolution of the pricing controversy, but it may not be enough to get the gas flowing into the market by June 2008.

RIL will need to enter into legally-tenable gas sales contracts with its customers before it can begin its countdown towards production of gas from the Krishna Godavari region.

This may not be an easy task unless the government clears the air on crucial issues with regard to the bidding process. eGoM is understood to have focused its discussions on the formula put forth by RIL. While a decision on the pricing formula is the prime mandate of eGoM, it perhaps also needs to take a call on the bidding process adopted by RIL. And this is where problems may arise.

Both the PM’s Economic Advisory Council (EAC) and the committee of secretaries have raised issues about the bidding process adopted by RIL. Questions have been raised on what has been called a selective bidding process where only consumers with stranded assets were invited to put in their bids. EAC had asked RIL to call for fresh bids calling all consumers along the route. It remains to be seen how the government or eGoM treat the matter. The finalisation of the formula could actually translate the bids into gas contracts if RIL’s bidding process is approved. However, RIL will need to call fresh bids if the government objects to the bidding process.

The other important issue is the formula itself. Although sources close to the development say there is a broad consensus on the formula adopted by RIL, even minor changes may warrant fresh bids. A government official said, “The bids were called on a given formula. A change in the formula could make the bids invalid and RIL may need to call for bids again.” It remains to be seen how the issue is treated once the price formula is finalised.

And, finally, one needs to look at the impact of the court cases RIL is involved in with regard to the allocation of gas from the KG Basin. In the case between RIL and Reliance Natural Resources, there is an interim stay restraining RIL from allocating gas to a third party.

The RIL-National Thermal Power Corp case is still on. It remains to be seen how RIL will go about finalising gas contracts with potential customers in light of the interim stay order. The government, on its part, has made it clear it would intervene if the case prolonged as it cannot allow the country to suffer due to litigation between two companies.

The government and eGoM will perhaps need to resolve the grey areas sooner than later if it wants the gas from the KG Basin to start flowing into the market from the middle of next year.