In these days of a weak rupee, there is nothing like having one's sales transactions denominated in dollars. Exporters do have this luxury, but what about companies selling their product in the domestic market?
Well, Reliance Industries is certainly a beneficiary here, as the entire pricing of gas from its Krishna-Godavari D6 fields is dollar-denominated, at a land-point level of $4.2 per mBtu.
If the rupee has fallen from an average of Rs 45 to Rs 53-to-the-dollar in recent months, it would roughly work out to an extra realisation of Rs 34/mBtu for the company. That is almost Rs 4.5 crore of incremental revenues on a daily basis.
The maths
Currently, Reliance is selling about 40 million standard cubic meters (scm) a day of gas. Now, one scm of gas from the D6 fields produces roughly 8,200 kilo-calories (KCal) of energy. It would mean 32,800 crore KCal from the daily sales of 40 million scm.
To understand the price implications, it is necessary to note that one mBtu (million British thermal units) is equivalent to 252,190.22 KCal. So, on 32,800 crore KCal or about 1.3 million mBtu, the additional Rs 34 realisation would bring in well over Rs 4.4 crore a day.
Dollar choice
What is interesting here is that in its original formula submitted to the Government, Reliance itself had proposed a rupee-denominated pricing mechanism for its gas.
However, the Government, on the recommendations of the Prime Minister's Economic Advisory Council, decided to opt for dollar-based pricing. The assumption, then, seemed to be that the huge forex inflows into the economy – almost $ 107 billion in 2007-08 – made the rupee a structurally strong currency. Opting for a dollar-denominated pricing, therefore, appeared to make sense.
But the last few months have drilled a big hole into this assumption, as the rupee, contrary to earlier expectations, has weakened significantly against all major world currencies, more so the dollar.
While Reliance would obviously stand to grain from the rupee's fall, the real brunt would, however, be borne by consumers of D6 gas.
What Consumers pay
Fertiliser units, for example, are now getting D6 gas at over $ 7/mbtu after adding marketing margin, central sales tax, transport charges, service tax, entry tax and other levies to the basic landfall price of $4.2/mbtu. In their case, the rupee's decline from Rs 45 to Rs 53-to-the-dollar translates into a larger increase of some Rs 56/mbtu.
A gas-based urea plant typically requires about 6 million Kcal of energy for producing one tonne of the fertiliser. If this entire energy is supplied from D6 gas, the extra Rs 56/mbtu to be shelled out on account of the rupee's weakening would translate into an additional cost of Rs 1,332 for every tonne of urea.
The only consolation for fertiliser makers is that urea prices are still controlled by the Government. Since it is outside the purview of the nutrient-based subsidy regime, any additional production costs incurred are passed through to the Government. It would, in turn, result in a higher subsidy outgo for an already cash-strapped Government.