Finance Ministry cautions against bank guarantees from Reliance Industries

The finance ministry has prepared a note warning the petroleum ministry not to accept bank guarantees from Mukesh Ambani's Reliance Industries until the differences over the pricing of gas from the KG D6 block are resolved.

The finance ministry fears that accepting any bank guarantee would dilute the government's case in the on going arbitration proceedings involving RIL. The government is arguing that the shortfall in gas production from the block - which has fallen to 10 mmcmd from 65 mmcmd three years ago - and has led to the terms and conditions of the production contract being violated - is the fault of RIL and other members of the exploring consortium and not because of geological surprises as the consortium claims.

This comes as an embarrassment for Petroleum Minister Veerappa Moily, who in last week of November went to Mumbai asking global players to invest in India's oil and gas sector. He had added that bank guarantees of the kind the ministry was seeking from RIL could effectively any differences that arose over oil and gas production.

Earlier, the union cabinet cleared the new gas pricing formula recommended by the C. Rangarajan committee. It will be applicable from April 1. A major issue that arose while discussing the new formula, which raises the price of gas, was whether the D1 and D3 fields in the KG D6 block - which are currently producing gas - should be kept out of its ambit.  "There was another option of forcing the consortium to sell the gas it had already committed itself to producing at the existing price, and benefit from the new pricing formula only for additional gas,"  says an officer aware of the developments. But ultimately it was decided that RIL should be allowed to take the benefit of new gas price, if it agreed to give bank guarantees. As per the agreed formula, the company would keep the difference between the new price and existing price as bank guarantee in favour of the government.

The finance ministry, which had earlier, in principle, approved the bank guarantee mechanism, now fears that in case the arbitration process goes on for an "indefinite" period, it could lead to bank guarantees of more than $9 billion., it would have to be monitored closely. "They would have to make sure that this bank guarantee remains valid till the arbitration is completed," says an official from finance ministry.

"We are also not sure, how petroleum ministry is calculating the investment multiple along with the profit petroleum, royalty and other revenues from the enhanced gas prices," the officer added.