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GAIL to Pay Royalty on Reliance Industries Gas Price: Report

State-owned GAIL India Ltd has been asked to pay royalty on the $1.41 per unit it is collecting on natural gas produced from Reliance Industries Ltd’s eastern offshore KG-D6 fields.

While announcing a 33 per cent hike in natural gas price to $5.61, the government had on October 17 said Reliance Industries (RIL) will continue to get the old rate of $4.2 for the main D1&D3 gas field in KG-D6 block and the incremental $1.41 per unit will go into a gas pool account, managed by GAIL, till the dispute over fall in output is settled.

Announcing the operational details of the gas pool account, the Oil Ministry said the royalty at the rate of 5 per cent would be paid on each of the two components of the gas price separately.

RIL and its partners BP Plc of the UK and Niko Resources of Canada would pay royalty on $4.2 per million British thermal unit as is being done at present, official sources said.

For the balance amount, the royalty would be calculated and paid by GAIL from the gas pool account on a monthly basis to the government, they said.

Rejecting RIL’s proposal to collect entire $5.61 per mmBtu amount and depositing the incremental revenue after payment of royalty in the gas pool account, the ministry said consumers will pay $4.2 to the three contractors and the incremental revenue to GAIL.

For this purpose, the KG-D6 partners will raise two sets of invoices – one for $4.2 to be paid into their accounts and the other for the incremental price which will go to a HDFC account maintained by GAIL.

RIL, while its proposal had reasoned it, is in a better position to collect the gas price as it has taken sureties in form of bank guarantees and letter of credits (LCs) from consumers to guard against default.

Sources said the ministry in the guidelines stated that GAIL will “promptly report” to the government in case of any default in payment of the incremental $1.41 amount.
Consumers will pay other statutory liabilities such as sales tax/VAT on the entire amount.

The government has disallowed $2.3 billion in cost for D1&D3 output falling to less than a tenth of the initial projection of 80 million standard cubic meters per day.

RIL and its partners disputed the cost disallowance, saying the output fall was because of geological complexities and the signed contract does not provide for such cost disallowance. An arbitration was subsequently initiated in the matter.

RIL and partners will get incremental revenue accruing in the pool account if they win the arbitration.

The guidelines are silent on how GAIL should put the money accruing in the pool account to use. RIL wants this money to be invested in high interest yielding schemes so that it gets its due amount along with interest.

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