Reliance Seeks Gas Increase as $4 Billion Investment Stalled

Reliance Industries Ltd., BP Plc and Niko Resources Ltd. issued an arbitration notice on the Indian government to try implement a delayed gas-price increase.

Failure to implement the increase is preventing the companies from sanctioning investments of almost $4 billion this year, they said in an e-mailed joint statement yesterday. Reliance, controlled by India’s richest man Mukesh Ambani, operates the country’s biggest natural gas deposit, the KG-D6 field in the Bay of Bengal.

“This can appear as a pressure tactic, but the onus is on the government to decide whether to go for arbitration or revise the gas prices to a level which is agreeable to both parties,” H.P. Ranina, a lawyer in Mumbai, said by telephone. “The arbitration process will take a few months to get initiated and probably a year or so to get resolved.”

Gas is used mainly for power and fertilizer production in energy-deficient India, and pricing is a sensitive topic given more than 800 million of its population live on less than $2 a day. Anti-graft politician Arvind Kejriwal, former chief minister of Delhi, has attacked the planned increase as unfair for consumers facing inflation exceeding 8 percent.

Pivotal Issues

The cost of living and a slowdown in India’s economy are pivotal issues in the nation’s general election, which began April 7 and concludes May 16. India’s Election Commission on March 24 ordered the federal oil ministry to defer an increase in prices of gas until polls end.

“The continuing delay on part of the government of India in notifying the price in accordance with the approved formula for the gas to be sold has left the parties with no other option but to pursue this course of action,” Reliance and its partners said in the statement yesterday.

Reliance shares rose 3.9 percent to 997.60 rupees in Mumbai on May 9. The stock has advanced 11 percent this year, compared with an 8.6 percent gain in the key S&P BSE Sensex.

For every $1 increase in gas prices and at a production rate of 15 million cubic meters a day, Mumbai-based IIFL Holdings Ltd. estimates Reliance’s earnings per share will gain by 1.5 percent in the year that began April 1.

The Cabinet last year approved a new formula for calculating gas prices starting April 1, 2014, almost doubling rates for locally produced fuel. Gas from the KG-D6 block is currently sold at $4.2 per million British thermal units.

Pricing Clarity

Clarity in pricing is needed for $8 billion to $10 billion of investment over the next few years that aims to “significantly increase production” from the KG-D6 block, Reliance said in the statement.

In November 2011, Reliance first started arbitration proceedings against the government, seeking a decision on its entitlement to recover investments made in the KG-D6 gas field from sales. The company said on May 4, 2012 it was entitled to recover all costs of the block in the Bay of Bengal under its production-sharing contract with the government.

Output there has slumped for four consecutive years, with Reliance saying the gas is more difficult to extract than previously anticipated. Production has dropped to about 10 million cubic meters a day from more than 60 million in 2010.

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