Natural gas price hike uncertainty to upset investment plans

New Delhi | Updated: Mar 26 2014, 17:41pm hrs
GasGas price hike uncertainty will also disrupt fuel matrix, jacking up costs of consumer industries like fertiliser.
THE uncertainty created by Election Commissions postponement of natural gas price hike till the polls are over could not only hamper the investment plans of exploration and production (E&P) companies, but also disrupt the countrys fuel matrix, jacking up costs of consumer industries like power and fertiliser.

State-run explorer ONGCs output expansion plans are contingent on how vigorously it can pursue the cost-intensive deep water blocks. If the gas prices are remunerative, * Oil & Natural Gas Corpn, which already shoulders a heavy burden of the subsidies on petroleum products, may have to re-draw its E&P road map. That, coupled with private players like Reliance Industries and BP turning cautious, could cost the country dear in terms of costlier fertilisers and power and potential unsustainable strain on government finances.

If the Rangarajan formula approved by the government in June 2013 and pricing guidelines issued in January 2014 were to be implemented, gas price price would have nearly doubled from $4.2/mBtu at present. The revised price was to be effective from April 1.

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ONGC was expecting an addition of R2,400 crore annually in its profit after tax (PAT) for every one dollar increase in gas price. Chairman and managing director Dinesh K Sarraf told FE that he was still optimistic and expressed the hope that the new gas pricing regime would be in place not later than three months from now.

Sarrafs predecessor Sudhir Vasudeva, who retired on February 28, has drawn up a Perspective Plan 2030 to invest R11 lakh-crore over the next 18 years to more

than double the firms hydrocarbon output.

According to the countrys largest explorer, even a higher gas price of about $8/million British thermal units (mBtu) is not enough to monetise more than dozen hydrocarbon finds across its fields. For example, ONGC found two gas discoveries in the Mahanadi Basin. But it can take out gas from them only when the price is at least $11/mBtu that accounts to 10 per cent return on equity.

Commodity (gas) price is key to decision making. Global explorers would not be interested (in investing in India) if gas price stays at $4.2/mBtu as they would have several other choices. India will have to give a fiscal regime that is conducive for oil and gas business, said Dilip Khanna, partner (transaction advisory services) at Ernst & Young.

Global oil and gas player BP and its partner Reliance Industries were planning to invest $5-10 billion to quadruple natural gas production by 2020 from all its acreages in the country. Currently, the KG D6 output, jointly operated by RIL and BP along with Canadas Niko, is around 13 mmscmd only. This is as compared to the original target to scale up production to 80 mmscmd by 2012 and the peak output of 68 mmscmd achieved in 2010.

The RIL-led consortium, fighting the allegation that it suppressed output at KG D6, has long maintained that what caused the decline in production was geological complexities encountered.

In FY15, ONGC targets to invest R36,000 crore. Of this, about R12,000 crore would be spent on exploration and drilling activities, while another R8,000 crore would be spent on development of the fields, said Aloke Kumar Banerjee, Director (Finance) at the firm. Banerjee told FE that the company has spent nearly R3,500 crore less than the planned capital expenditure in FY14 because some contracts couldn't be awarded. This offers ONGC a cushion to take up R36,000 crore of capital expenditure plan for the next year. The operating expenses of the company is increasing every year by about 8% and it was important to get a better price for gas to sustain the current output and find new resources.

Banerjee also said that volatility in the prices for hiring rigs and fluctuation of the rupee against the dollar were also serious concerns. The rig market has drastically changed in the past three-four years. You would be astonished to see the variation in prices, he added.

A similar trouble may be brewing for RIL and its partners BP and Niko Resources for investing in the KG basin. The cost of exploration is going up, as finding hydrocarbon in deep water blocks is very capital intensive and involves high risk, said Kalpana Jain, Senior Director at Deloitte Touche Tohmatsu India Private Limited.

Not only in India but in most other places, any incremental production of hydrocarbon is coming from tougher geological areas. For existing players in the country, the cost of development is increasing and they would want ouput prices to be remunerative. The global investors would await the policy guidance from the new government in terms of fiscal regime and tax treatments, said Khanna of EY.

BP India head Sashi Mukundan said earlier this year the production from all their acreages including KG D6 where it is a partner, could rise to 40 -60 mmscmd by 2020. The incremental production is expected to come from more than 10 satellite fields in KG-D6 block, another reserves in NEC-25 and in Cauvery block, he had said. I do believe there is a huge potential to find more hydrocarbons in the Indian basin and our presence, investment and track record to date is a testimony to this. Our joint venture alone could reveal a prize of over $100-150 billion for India by avoiding costly imports, Mukundan had said.

Petroleum minister Veerappa Moily corroborated this view when he said on Tuesday that unless price is revised, domestic gas production would suffer, leading to more dependence on imports which could cost anywhere between $15-18/mmBtu.

RIL and BP did not respond to queries sent by this newspaper seeking details of their investment plan. Kris Gopalakrishnan, President of industry body CII said on Tuesday: The decision to hold back price revisions could have a long-term (adverse) impact on the investment climate in this crucial sector.

Siddhartha P Saikia