'D6 revenues to come from volumes, marketing margin

As with all Reliance Industries Ltd (RIL) deals, the gas sales and purchase agreements (GSPA) and gas transportation agreement (GTA) which RIL and Reliance Gas Transportation Infrastructure Ltd (RGTIL) inked with the 12 fertiliser companies had its own share of ticklish issues.
The Government has fixed the gas price at $4.2/mBtu, at landfall point (excludes the taxes, transportation tariff and marketing margins).
RIL’s marketing margin at 13.5 cents/mBtu is lower than that being charged by GAIL (India) Ltd (17 cents). Marketing margin is the only component that the contractor is free to decide. After successfully sealing the GSPAs for its D6 gas from the East Coast, Mr P.M.S. Prasad, President and CEO (Petroleum), RIL, spoke to Business Line on concerns and standards which this contract has set for future agreements:
Where do you think the revenues are going to come from for the D6 gas?
We are looking at volumes and marketing margin to earn our initial revenues. We hope to transport a large volume, almost 65 mmscmd out of 80 mmscmd (once we reach peak production) through East-West pipeline network. (The revenue from marketing margin of 13.5 cents could be around $110 million on an annualised basis, if the company markets the entire volume of 80 mmscmd, which is towards the risk undertaken in the agreement). On the gas sales at $4.2/mBtu, the company’s turnover will be about $3,400 million annually ($9.5 million a day). The revenues from gas transportation would go to RGTIL, which is the operator of the 1,438-km East-West pipeline from Kakinada in Andhra Pradesh to Baruch in Gujarat.
Has a decision been taken on the transportation tariff? What is the indicative tariff being proposed by RGTIL?
I believe RGTIL will be submitting an indicative tariff structure to the regulator. However, the final decision will depend on the regulator’s decision, which is expected soon. I believe that the tariff for 300 km of the network from Kakinada would remain the same. It is difficult for me to give any tariff numbers, but I think it could be around 30 cents in Andhra Pradesh. The regulator has said that there would be zone tariff with each zone measuring 300 km. Therefore, the network of 1,438 km would be divided into five zones.
Do you think the contract will set a benchmark for future such agreements, as the D6 gas price is said to be a benchmark? What is the liability which RIL is taking in the entire project? There is also a force majeure clause in the contract which you have signed. What are the circumstances envisaged under which this clause will be applicable?
After much deliberation and consultations among the buyers, sellers and the two nodal Ministries – Fertiliser and Petroleum – the details of this contract have been worked out. I would say, it does justice to all stakeholders. Yes, it would set a benchmark for future contracts.
As regards force majeure clause, it is a standard provision, which has been mutually adjusted to accommodate incidents that are beyond control of either parties and the parties are excused from any non-performance in such events.
In situation where because of failure on buyer facility if gas could not be taken, then they will have to take or pay. However, the money would be adjusted in the future outstandings. And at the end of the contract if some money paid by the buyer still remains, and the buyer has not been able to receive gas then the entire amount will be refunded.
You are still awaiting a list of power companies to whom 18 mmscmd of gas has to be allocated as outlined under the gas utilisation policy decided by an Empowered Group of Ministers. With production about to begin in the first week of April, will it not affect your production schedule, as only supplies for 15 mmscmd of the initial 40 mmscmd have been tied up.
I agree that we will require a couple of weeks to work out an agreement with the power companies. We have requested the Government to give us the list by April 7. Otherwise, the Government/RIL may have to consider alternative arrangements so that the production plan is not disturbed. According to the production sharing contract (PSC), we have obligations to sell the entire gas. Once the gas starts flowing how can you stop it.
The fertiliser companies are going to pay RIL and its partner NIKO in rupee. We are given to understand that NIKO will face difficulties if this happens?
Yes, we are told that since fertiliser companies only sell in the domestic market, they would be making payments in rupee. NIKO has the right under the PSC and GSPA to be paid in dollars. Besides, there have been past instances where foreign players have been paid in dollars.
This gas is going to flow from Dhirubhai I and Dhirubhai III fields of D6 Block for which the pricing has been derived. RIL has discovered more gas in the block. What kind of pricing are you looking at for these additional finds from the block? What are the other exploration activities which RIL is looking at?
RIL has made an investment of $5.2 billion for the phase-I development of D6 block. Work is still going on. We still have to drill more development wells in D6 Block. We have a plan of 22 wells, of which 18 have been drilled. We have made eight satellite discoveries (these are small discoveries on the periphery of the main find). The development plan for this has been submitted to the Government.
We hope that by the time the entire D6 gas starts flowing, the supply-demand situation for natural gas in the country would have undergone a major change, and a more competitive environment will be there.
The initial production from the D6 block is estimated at 40 mmscmd. The gas is expected to start flowing in the next few days and supplies to consumers’ users will begin from mid-April. RIL plans to start production with 10-12 mscmd of gas in April and will ramp it up to 40 mmscmd by July and reach peak production of 80 mscmd in a year.