Sept. 13 (Bloomberg) -- India capped natural gas prices 34 percent below a global benchmark, cutting returns for Reliance Industries Ltd., and deterring global companies from exploring.

The government yesterday ordered Mumbai-based Reliance, India's biggest company, to sell natural gas from the Krishna Godavari field for $4.2 per million British thermal units, less than the about $4.5 it was seeking. The price will be a benchmark for all producers in the country, the oil ministry said in a statement in New Delhi yesterday.

Lower gas costs ensure subsidized power and fertilizer for farmers, whose votes helped Prime Minister Manmohan Singh form a ruling coalition in May 2004. Regulated prices may delay projects that would ease a shortfall of the fuel, forcing utilities to seek alternative supplies.

``If prices are deemed too low and prevent further exploration and production, then India will have to import LNG or gas through international pipelines to meet growing demand,'' said Cecile Jovene, head of the gas team at Facts Global Energy in Singapore. ``They will have to pay international prices for imported gas.''

The Communist Party of India (Marxist), an ally of Prime Minister Singh's ruling coalition, opposed the approval and said viability of the fertilizer and power industry will be affected. Farmers and ``the common man'' will have to bear the brunt by paying a higher price for fertilizers and power, the party said in an e-mailed statement today.

International Gas Price

Gas for October delivery traded at $6.34 per million British thermal units at 4:26 p.m. India time on the New York Mercantile Exchange. In July, Japanese importers paid an average of $7.29 for imported liquefied natural gas. Prices of LNG delivered to Japan, the world's biggest importer, have more than doubled since 1999.

Reliance's dispute with the government may deter investment by BP Plc, BG Group Plc and Exxon by capping profit from developing about 20 trillion cubic feet of gas discovered since India invited overseas explorers to drill.

The government's refusal to ratify a higher proposed price may delay the $5.2 billion Krishna Godavari project for one year and halt bank funding, P.M.S. Prasad, president of the company's oil and gas business, said in a July 30 letter to Oil Minister Murli Deora, obtained by Bloomberg News.

`Open Market'

Under the drilling license, the government should approve the price ``as a matter of course,'' Prasad said in his letter, referring to a license term allowing ``sales made freely in the open market.''

Gas from the Krishna Godavari field would ease a shortage that forced NTPC Ltd., India's biggest power producer, and rivals to idle one-third of their generators. The utility plans to import as much as 3 million metric tons a year of liquefied natural gas from Nigeria.

Reliance rose 13.55 rupees, or 0.7 percent, to 2,026.5 rupees at the 3:30 p.m. close on the Bombay Stock Exchange.

``The pricing is in line with what Reliance was expecting,'' said K.K. Mital, who helps manage 1.5 billion rupees ($37 million) of stocks at Escorts Asset Management in New Delhi. ``This pricing should be acceptable to all the parties, including the power producers and fertilizer makers.''

`Public Good'

Contracts with explorers under a policy introduced in 1999 allow the government to examine and approve natural gas prices, M.S. Srinivasan, secretary, ministry of petroleum, said in an interview in Singapore last month. The contracts allow the government to step in if the ``public good'' is affected, he said.

Srinivasan, while declining to comment on the outcome of the gas pricing dispute that preceded yesterday's decision, said that the government was committed to honoring production sharing contracts.

Reliance's billionaire Chairman Mukesh Ambani has been fighting a separate court case with companies run by younger brother Anil Ambani and state-run NTPC. Reliance had agreed to sell 28 million cubic meters of gas a day at $2.34 per million units to group companies that subsequently went to Anil after a fight over ownership, the Press Trust of India said on July 26 last year.

The oil ministry said yesterday's price has no bearing on the High Court case.

``There has to be an economic rationale,'' said V. Raghuraman, senior adviser, Confederation of Indian Industry, the nation's biggest industry body. ``Otherwise it will be difficult to get good players with the best technology to get into exploration.''

To contact the reporters on this story: Manash Goswami in Delhi at mgoswami@bloomberg.net; Dinakar Sethuraman in Singapore at dinakar@bloomberg.net.

Last Updated: September 13, 2007 07:39 EDT