Reliance Industries Ltd has alleged that the petroleum ministry is violating coal bed methane contract by restricting price discovery which could lead to revenue loss for the central and state exchequers.

Last week, the company’s executive director PMS Prasad sent a letter to Union Finance Minister Pranab Mukerjee, who also heads an empowered group of ministers on commercial utilization of domestic natural gas. Prasad has urged Mukherjee to ensure sanctity of the contracts that guide coal bed methane pricing.

The letter was sent days after the company slapped an arbitration notice on the petroleum ministry, which was toying with the idea of restricting Reliance’s cost-discovery related to KG-D6 block, for failure to match production targets. The letter assumes importance as RIL’s submission of a CBM price formula is under the petroleum ministry’s consideration.

Prasad in the letter said that “Not only do these guidelines impinge upon specific provisions relating to price discovery in the contracts they even seek to ignore the norms for price discovery as laid down for New Exploraton Licensing Policy (Nelp ) by the EGoM.”

He added that while the EGoM had decided that in spite of priority all consumers can participate in the price discovery process, the petroleum ministry has issued contrary guidelines requiring the operator to discover price amongst identified priority sectors.

The ministry said that bids can be invited only from identified customers and sectors. He wrote that “This not only violates the provisions of the CBM contract but even denies all consumers the right to participate in the price discovery process, which was the principle accepted for NELP by the EGoM.”

He added the purpose of a market-based pricing mechanism in the policy is to ensure that a contractor does not arbitrarily suppress prices to the financial detriment of the government.

The petroleum ministry guidelines not only restrict price discovery in violation of the contract but, also proposes reservation of CBM gas for future plants, which would go for financial closure once available CBM gas is indicated to them. “Such guidelines is in contradiction to the policy and contract and restricts free trade mechanism”, he said.

CBM or coal bed methane gas is similar to natural gas, containing 90 to 95% methane. RIL has CBM resources in two blocks located in Madhya Pradesh which are yet to being commercial production. RIL wants to price CBM gas from its blocks using the same formula that state energy companies use to sell liquefied natural gas.