- 1. KG Basin Gas Dispute & NTPC Group Colleagues: Nisha
Barot 08 Manisha Choithani 13 Suchita Hotchandani 24 Rati Motwani
38 Dimpi Sanghavi 50
2. KG Basin 3. 4. About KG Basin
- KG basin is on the east coast of India and extends both to land
and offshore.
- D-6 Block wasawarded to Reliance Inds and Niko Resoureces Ltd
under NELP I bidding round
- Around 7 trillion cubic feet of natural gas was discovered by
Reliance in the Krishna Godavari basin in October 2002
- The on-land portion covers 28,000 sq km and the offshore
portion, including deepwaters, covers an area of about 145,000 sq
km. The basin has extensive seismic coverage in the on-land and
shallow water areas.
- More than 350 exploratory wells have been drilled in the basin,
resulting in numerous oil and gas discoveries
5. About KG Basin
- The company will initially produce up to 40 million metric
standard cubic meters per day (mmscmd) of gas, which would be
scaled up to 80 mmscmd by 2010.
- The sale of gas from the initial production is disputed and the
Bombay High Court has restrained the company from selling gas to
any third party besides NTPC and RNRL.
- RIL is embroiled in separate legal battles with NTPC and
RNRL
6. Partition in 2005
- Reliance Group was split up in Anil Ambani & Mukesh
Ambani
- RIL going to Mukesh Ambani & RNRL to Anil Ambani
- Family pact was made in 2005 in which, RIL was tosupply 28
million cubic meters of gas a day at $2.34 per million units to
RNRL for 17 years
7. What Dispute is all about?
- RIL agreed to sell RNRL 80mmscmd of gas from KG Basin for 17
years at $2.34 per mmbtu for its Dadari power plant.
- RIL is not supplying the gas at agreed rate, RNRL went to court
against it for not implementing this part of a family MoU signed
when the empire was being carved up between the two brothers.
8. How Petroleum Ministry in picture?
- RIL got the right to look for gas in the KG basin after signing
a PSC with the government.
- In the PSC, the government gets a share of RILs KG profits
- Since profit are related to the price, the government said it
has the right to vet each contract RIL signs to sell gas.
- The ministry used this to reject the RIL-RNRL contract, saying
it was not an arms-length one.
9. Controversy because.
- No contract between parties
- RNRLs main contention was that RIL should supply gas on the
terms it has agreed with NTPC
- RNRL was not happy with the terms of the Gas Supply Master
Agreement
- RIL claims that the supply of gas from KG Basin to ADAG was not
part of the division
- Anil Ambani accused the petroleum ministry of favoring RIL
10. Root problem
- RNRL argues the ministrys role under the PSC is limited to
ensuring it gets fair share of profits theoretically
- RIL can give the gas away free as long as it gives the
government its share of the profit
- Based on either the price fixed by the government or on a
competitive arms-length bidding process
11. Root problem
- Interestingly, while answering question in parliament, the
government stance for year has been that its role is limited to
ensuring it gets its share of profits
- The Bombay High Court has ruled that the family MoU does not
violate the PSC- that is, the ministry could not cancel the
RIL-RNRL agreement
- RIL challenged this in the Supreme Court
12. Governments stand on dispute
- Government wants early solution to the gas dispute
- Krishna Godavari basin is a national Property
- 30 MPs of left front asked the government to take over the
distribution and marketing of gas from Basin
- RIL has to pay the royalty to Government
- Government has the right to fix the price & also dictate
whom RIL sell to
13. How arms length price when no bidding?
- In 2003, NTPC invited global firms to bid to supply it gas for
its Kawas-Gandhar power plant for 17 years
- RIL bid the lowest $2.34 per mmbtu and NTPC gave it a latter of
intent in June 2004
- The RIL-RNRL contract was based on this since it was signed in
the same time period
- Except that the RNRL contract was for 28 mmscmd of gas while
the NTPC one was for 12 mmscmd
14. How arms length price when no bidding?
- RIL later objected to some of the clauses in the NTPC tender
and refused to supply the gas
- NTPC went to court against RIL
- RNRL argues that since the contract was based one NTPC one, it
was an arms-length one
15. Court Verdicts Bombay High Court Ordered RIL to supply the
gas as per the original statement The Bombay High Court allowed
Reliance Industries to sell gas from KG basin at the
government-approved price of USD 4.20 per mmBtu as an interim
measure, while reserving judgment on a case brought by RNRL 16.
Market Price of Gas
- RIL had called for bids from buyers in April 2007, and they bid
an average price of $4.33 per mmbtu
- After some minor tweaking, the government accepted $4.20 per
mmbtu as the price
17. Any loss to RIL or government at $2.34?
- Compared to $4.20, they do
- RILs cost of producing gas, according to the DGH (Directorate
General of Hydrocarbons), is $1.28 per mmbtu, so it doesnt really
lose at $2.34 though it does earn less
- The governments gain/losses are more complicated
- If gas prices are raised, fertilizer and electricity prices
also go up and consumers end up paying more to keep them at the
same level, the hike required in government subsidies will be much
more than the increased profits it gets when the gas is priced at
$4.20
18. RILs Capital Expenditure Under the PSC, RIL first gets to
recover its capital and operating costs out of whatever revenues
get generated; it is only after this that the government get a
share in the profit this share rises as RILs revenue to cost ratio
rises If its capital expenditure goes up, the governments profit
fall The DGH says the capital expenditure has been verified by
independent experts including the CAG (Comptroller & Auditor
General of India) the CAGs report, however, has not been made
public 19. ESTIMATED COST OF PRDN OF KG BASIN Sr.No Particulars Amt
(in mn) 1 G & G Studies 34.67 2 Reservoir and Completion
Studies 22.66 3 Development Wells 1164.58 4 Prdn Facilities 13.82 5
Eco-Protection 4.3 6 Administration 20.5 7 IT 9.46 8 Kakinada
Captive Berth 54.96 9 Owned Support,Intervention Vessel and
Helicopter 150 5196.58 20. RILs Calculations* Post-Well Expenditure
Cost ($/MMBTU) RILs development Exp. (Capex) in KG 0.54118
Production (Operating) Exp. 0.2211 Interest Cost 0.1316 Total
post-well exp. 0.8945 Pre-Well Expenditure Cost ($/MMBTU)
Exploratory Exp. (Capex) 0.144 Production Exp. (10% of Capex*)
0.170 Total pre-well Exp. 0.314 Royalty @ 5% on margin
($4.2-$0.314) 0.02 TOTAL NET COST OF PRODUCTION 1.43 21. RILs
Capital Expenditure
- RNRL has pointed out that these experts werent really
independent and were connected with RIL in various ways
- Besides, two of the four member management committee that okays
RILs costs for the KG basin are employees of RIL under the PSC,
this will be common for all contractors, not just RIL
22. At sales price of $2.34 Even at a sales price of
$2.34/mmbtu, RIL maintains a profit margin of a little over 60% 23.
IF JUDGEMENT IS IN FAVOR OF NTPC AND RNRL
- RIL's revenues from gas sales could take a big hit if the
judgment is indeed operationalised.
- The judgment would lead to Reliance Industries suffering losses
to the tune of Rs 3,600 crore.
24. Gas Utilization Policy
- Fertilizer: Ideal feedstock for Urea production
- LPG & Petrochem: Need to boost domestic LPG production to
reduce imports
- Power Plants: All sources of energy, included coal and gas,
need to be harnessed to achieve 8-10% growth
- City Gas: Vital necessity for urban dwellers
- Refineries: Currently using costly alternatives like crude/fuel
oil for processing and burning naphtha
- Other industries: Sponge Iron, ceramic units
25. IMPACT ON SHARE PRICES OF RIL AND RNRL DUE TO JUDGEMENT 26.
27. 28. ROLE OF RNRL
- ADAG claims right over 70 per cent of KG-D6's initial output of
40 million standard cubic meters per day by virtue of a family
split
- The 28 mmscmd gas is to be used as feedstock at the 3,500 MW
plant at Dadri in Uttar Pradesh
29. IMPACT ON RNRL
- It will result in lower cost of production.
- Whatever power they produce from 28 billion cubic meter of gas,
they will have to pay about Rs 3,600 crore less
- In case Reliance Industries produces more than 80 million cubic
meter per day, RNRL can claim 40% on that excess production
too
30. IMPACT ON RNRL
- If RNRL is able to get gas at $2.34 per unit, RNRL will add
another $1 per unit to the $2.3 per unit rate at which it is
getting gas, towards transportation charges and marketing margins
in order to supply to Reliance Infra and Rel Power.
- Some calculations show the quantity may fall short by 20 per
cent at Dadri. The excess gas could be thus billed at a higher rate
of $4.2 per unit.
31. IMPACT ON NTPC
- NTPC doesnt lose a single paisa whether it buys gas from RIL at
$2.34 per mmBtu or at $4.20
- National Tariff Policy, by January 2011, PSUs like NTPC will
have to participate in open bids to sell their power
- NTPC has to pay a higher price for RIL gas, it will never be
able to compete with others
32. IMPACT ON NTPC
- Offered 50 per cent higher liabilities than what NTPC was
giving us for non-acceptance of delivery of gas
- Tapti trading at $5.7 and GAIL at $6.75
33. IMPACT ON FERTILIZER SECTOR
- Natural gas constitutes about 60% of the cost for production of
fertilizers in gas-based units vis--vis 75% in naphtha-/fuel
oil-based units.
- Prices of urea is government regulated and currently fixed at
Rs 4,830 per tonne.
- Switching over to substitute feedstocks based plants to natural
gas is estimated to generate another 7.2 mmscmd of gas demand.
- Fertilizer sector has been allocated 15 mmscmd of gas from the
first 40 mmcmd gas production from KG D-6.
34. 35. 36. 37. CONCLUSION 38. THANK YOU