Petrol Stop - Expert to check RIL’s oil pricing math

Petrol Stop Home

Expert to check RIL’s oil pricing math

Sunday, 19 July 2009

20 July 2009;economictimes.indiatimes.com:Rajeev Jayaswal:NEW DELHI: An international expert will examine the pricing formula proposed by Reliance Industries (RIL) for the crude oil produced from its D-6 block in the Krishna-Godavari basin, an oil ministry official said. RIL has proposed a pricing formula for its KG-D6 crude oil that is benchmarked with Bonny Light oil—a high-grade Nigerian crude oil—with a 2% premium. At present, its consumers Hindustan Petroleum (HPCL) and Chennai Petroleum (CPCL) buy the KG basin crude in spot sale at a fixed discount of $5.34 a barrel on Bonny Light, a company source said. A Reliance Industries spokesperson declined to comment on this issue. “A 2% composite premium over Bonny Light quotation would be added to reflect the quality differential between the two crude oils,” RIL said in a letter to the oil ministry. RIL can sign term sale (long-term contracts) for KG crude with refiners such as HPCL and Chennai Petroleum only after the government accepts its pricing formula. The oil ministry has requested its Petroleum Planning & Analysis Cell (PPAC) to engage the services of an international pricing expert to examine Reliance’s pricing formula, a ministry official said, requesting anonymity. PPAC is an expert arm of the ministry. The formula is meant for valuation of crude oil produced from New Exploration Licensing Policy (Nelp) regime, the official said. Valuation of the crude, undertaken through an arm-length process, is required to determine cost recovery, profit petroleum (government’s share of profit) and royalty, he added. Earlier, RIL had engaged global consultants who had benchmarked the D6 crude oil to the Tapis crude of Malaysia. It had invited expressions of interest from refiners such as HPCL, CPCL, Bharat Petroleum, IndianOil and Essar Oil for spot purchase. But the government-owned oil companies rejected the Tapis benchmark due to their poor pricing experience with that benchmark in the past. Later, Bonny Light was accepted as the benchmark. But only HPCL and CPCL agreed for spot buying. They bid a price of Bonny Light with $9.43 a barrel discount, which was not acceptable to RIL. Reliance offered $1.4 a barrel discount, but they finally settled for a discount of $5.34 a barrel, sources in RIL said. RIL commenced oil production from KG-D6 basin on September 17, 2008, with an initial production of 5,000 barrels per day.