Reliance, BP commit to pay for any shortfall in KG-D6 production to buyers

Reliance Industries Ltd and its partner BP Plc of UK have committed to pay in cash for any natural gas volumes they are unable to deliver to customers from the next wave of discoveries in the eastern offshore KG-D6 block.

According to draft gas sales and purchase agreement (GSPA) Reliance and BP have shared along with price discovery bids for incremental gas from the R-Cluster fields in KG-D6 block, the sellers will reimburse buyer money equivalent to gas sourced from alternate source to make up for any volumes they are unable to deliver.

The buyer on his part will be obliged to offtake the committed gas volumes or pay for it (take or pay).

The volumes not taken but paid for can be taken in subsequent quarters, the GSPA said.

These ship or pay and take or pay obligations will be waived in the event of force majeure events such as any act of God like earthquake and floods, fire, epidemic, acts of war, strike and lockouts, delays due to government/ regulatory actions and court orders.

Also, "loss, failure, impediment, restriction in output or deliverability of reservoirs in the gas fields" will be a force majeure event, it said.

Reliance had a decade back signed up to sell 60 million standard cubic metres per day of gas from the first set of gas fields in the KG-D6 block, but the output rapidly declined due to reservoir issues, leaving users such as power plants stranded.

The company had not reimbursed buyers for the shortfall, calling it an act beyond its control. The government had, however, levied penalties on it for failure to produce the committed volumes -- an act that the company has challenged through an arbitration. The outcome of the arbitration is pending.

While those initial fields have ceased to produce, Reliance-BP last month started output from the R-Cluster fields.

They in November 2019 sold the first 5 mmscmd from the R-Cluster field at a rate benchmarked against Brent crude oil, the duo has now invited bids for selling incremental 7.5 mmscmd of incremental output that is likely to be available from February benchmarked to a gas index, according to a notice inviting offers.

Reliance and BP have sought rates equivalent to JKM or Japan/Korea Liquefied Natural Gas Import Price.

Bidders have been asked to "quote the variable denoted as 'V' in $per million British thermal units (MMBtu) terms".

"The gas price (in USD/MMBtu (GCV)) shall be = JKM + V," the notice said.

GCV stands for gross calorific value.

'V' can be a positive, zero or negative number and up to two decimal places, but it cannot be less than (-) 0.30 USD/MMBtu, it said.

This means users will have to quote -0.30 or higher value of 'V'.

At the current JKM price, KG-D6 gas would cost $6 per mmBtu at the base or cut off price.

This is higher than $4.2 to 4.4 per MMBtu rate at which the first 5 mmscmd are sold at Brent crude oil benchmark. Brent crude oil is presently in the range of $50 to 51 per barrel.

However, the rate discovered will be subject to the cap the government places on gas price. The cap for six months to March 31, 2021, is $4.06 per mmBtu.

Reliance-BP is investing $5 billion in bringing to production three deepwater gas projects in the Block KG-D6 R-Cluster, Satellites Cluster, and MJ -- which together are expected to meet about 15 per cent of India's gas demand by 2023.

R-Cluster will have a peak output of 12.9 mmscmd while satellites, which are supposed to begin output from the third quarter of the 2021 calendar year, would produce a maximum of 7 mmscmd. MJ field will start production in the third quarter of 2022 and will have a peak output of 12 mmscmd.

Reliance has so far made 19 gas discoveries in the KG-D6 block. Of these, D-1 and D-3 -- the largest among the lot -- were brought into production from April 2009 and MA, the only oilfield in the block was put to production in September 2008.

While the MA field stopped producing last year, the output from D-1 and D-3 ceased in February.

Other discoveries have either been surrendered or taken away by the government for not meeting timelines for beginning production.

Reliance is the operator of the block with 66.6 per cent interest, while BP holds the remaining stake.