Highlights of the RIL-RNRL verdict

Highlights

• The Indian Supreme Court just released its long awaited verdict on the gas price dispute between Reliance Industries (RIL) and RNRL, ruling by 2 to 1 in favor of RIL. It was ruled that the government PSC takes precedent over all other agreements as RIL does not have absolute rights over the gas.

• As such, the original MOU signed between the Ambani brothers in 2005, in which RIL agreed to sell gas from the D6 field to RNRL at price of $2.34/mmbtu was agreed, was deemed non-legally binding as the MOU was not made public and no government approval was obtained on the agreed gas price of $2.34.

• The verdict did not however conclude what price RIL should sell the Dhirubhai gas to RNRL. Instead the court has given a period of 6-8 weeks for RIL and RNRL to renegotiate new contract terms. The agreed gas price will then have to be approved by the Indian government as the resource owner.

• Expectation- the final gas price will be as per the Indian government’s Gas Utilization Policy established in 2008, in which the gas price was fixed at $4.20/mmbtu for 5 years. While the ruling is positive for RIL in the short term, it is clear that gas prices will remain regulated by the Indian government in the long term.

Conclusion

India’s Supreme Court ruled today by a margin of 2:1 in favor of Reliance Industries in the long running gas pricing dispute with RNRL. The key points from the ruling are that the PSC takes precedent over the MOU and that the government has the right to decide the price of gas under PSC contracts. While the parties have 6 to 8 weeks to agree contract terms (including the price) of gas supply, we do not expect RNRL or RIL will have much scope for negotiation. Fundamentally, RNRL must effectively abide the terms under the gas pricing utilization policy which stipulates a price at the beach of $4.20/mmbtu fixed for 5 years. If the parties fail to agree, the government will mandate the official price or RNRL will lose supply rights. In the short term this is clearly a positive for RIL and its partner Niko in the D6 block. In the longer term the key point is that the government will become the de facto regulator of both onshore and offshore gas prices.

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