The Oil Ministry is considering ordering Reliance Industries to stop selling KG-D6 crude oil to its Jamnagar refinery and instead sell it to Chennai Petroleum Corp Ltd (CPCL) at lower rates.
The Production Sharing Contract (PSC) mandates producers to sell crude oil at the best available market rate so as to ensure highest profit petroleum and royalty to the government.
RIL, which sold crude oil from the MA oil field in the predominantly gas-rich KG-D6 block to CPCL during first five years of production on negotiated terms, floated a tender for sale of 2.5 million barrels of oil in 2014-15.
Jamnagar refinery of RIL won the tender as CPCL offered a pricing formula that was about $4-5 per barrel less than the formula quoted by the private sector refiner.
The Oil Ministry is now of the view that sale of crude oil is to be done at arm's length and "therefore cannot be done to an affiliate," a senior ministry official said.
It believes RIL's Jamnagar refinery would not qualify for this bidding as per PSC provision and the company would have to go for the next option which in this case is CPCL. Also, RIL may go for a fresh tender for getting an arm's length price.
The official said that in the interim period, the ministry is considering directing RIL to stop sale to its affiliate Jamnagar refinery and sell it to CPCL at the price quoted by it.
RIL however refuted this view saying that "there is no restriction in the PSC that the oil and gas cannot be sold to related party as long as an arm's-length process is followed".
While higher price would give government more profit petroleum and royalty, CPCL being a subsidiary of IOC, does not pay any dividend to government on its profit.
"PSC obliges Contractor to sell at the market determined price to the benefit of all Parties. The sell at higher price to RIL Jamnagar refinery would entail additional profit petroleum and royalty. Petroleum Ministry has never questioned that the process followed is in violation of PSC," a company spokesperson said.
RIL said it earlier sold the crude oil and is now selling condensate to PSUs under similar process followed wherein RIL Jamnagar was not the highest bidder. "No question was raised as to the same bidding process," he said.
The ministry official said CPCL wanted the pricing mechanism to be reopened as it felt a premium of 2 per cent over widely traded Bonny Light crude oil, reflecting quality differential, was not justified.
The crude, CPCL felt, produced more naphtha and less of high value diesel, and so offered a price formula which was about $4-5 a barrel lower than the one offered by RIL.
The official said: "It appears that terms and conditions of the tender has been framed in such a manner that none other than RIL Jamnagar refinery could participate."
RIL spokesperson however refuted this saying that "having followed a robust transparent bidding process, the allegation that RIL has tailor-made the formula is only an after- thought."
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