Reliance Industries Limited (RIL), a Mukesh Ambani owned energy conglomerate, is reportedly at the helm of making loses from its D6 block by selling its gas at $ 4.2 per million metric British thermal unit (mmBtu), credited largely to the low price of gas affixed by the government.
Facing allegations of inflation of capital expenditure incurred on account of its Krishna – Godavari (KG D6) gas fields from the Comptroller and Audit General (CAG), RIL, in its reply, has stated that it is incurring losses on 1.5 trillion cubic feet (tcf) of gas produced from the KG D6 fields, which is equivalent to 250 million barrels of oil imports, valuated at almost $ 25 billion. Import of equivalent volume of LNG would cost around $ 12 billion, increasing subsidy burden on the government by a minimum of $ 6 billion. According to the price affixed by the government, the KG D6 gas output has been sold for only $ 6 billion, at a price that is far lower than the average market price and the Administered Price Mechanism (APM) price.
CAG, in its audit report, had marked an allegation that RIL had incurred an unwarranted increase in its cost expenditure. Reliance Industries, however, rebutted CAG allegations stating that the audit body had made an erroneous valuation of cost recovery and production sharing provisions of the production sharing contract (PSC). An operator that incurs increase in cost expenditure does not imply an increase in profits for that operator; it is rather otherwise, stated RIL. Given the impending situation which could possibly leave both the government and RIL facing severe loses, the government still stands to recover its losses by way of reduction of subsidy burden, while RIL has no way of recovering its loses.
KG D6 gas field has been one of India’s most productive fields, and has been acclaimed worldwide for its cost effectiveness and timeliness of process. Marking its output at significantly low margins will affect the ex chequer and the operator drastically.
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