ONGC has been given an assurance by the Gujarat government that the national explorer will get at least $6/mmBtu for the gas from the Deen Dayal-West (DDW) block in the Krishna Godawari basin in the first year of production. The assured price will see staggered increments every year — it will touch $6.9/mmBtu in the fifth year and remain at that level during the remaining life of the asset. The move to offer a price guarantee is expected to help ONGC and state government-owned Gujarat State Petroleum Corporation (GSPC) to conclude the announced acquisition of the latter’s 80% stake in the asset by ONGC by March 31. Under a deal signed earlier, ONGC will pay debt-laden GSPC $1.2 billion for the stake. Gujarat’s move would make the deal more palatable to ONGC, analysts said.
Given that the current ceiling price of $5.3/mmBtu for the gas from difficult fields — DDW is a high-pressure-high-temperature-low-permeability area — the state government would have to bear cost of about $0.7 per mmBtu of gas produced in the first year of production. As DDW’s recoverable asset is now estimated at around 1 trillion cubic feet (tcf), the guarantee will cost Gujarat $700 million (R4,680 crore at Thursday’s exchange rate) during the life of the asset, if the price differential of 0.7/mmBtu stays unchanged.
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While GSPC has 80% stake in DDW, GeoGlobal Resources and Jubilant Enpro hold 10% each. If ONGC is offered an assured price, other investors will also be entitled to that, analysts said.
“The assured price will be $6 in the first year.. it will increase to $6.28, $6.4 and so on every year reaching $6.9 in the fifth year which (will continue) till the end of the profile. All the considered prices are protected to the company by the government of Gujarat,” said an ONGC executive, requesting not to be named.
ONGC board on Thursday approved execution of the farm-in/farm-out agreement with GSPC regarding the deal. The agreement essentially lays down the modalities of the participative interest and change of operatorship with the approval of the government as per the existing production-sharing contract and joint operating agreement of the block. DDW block is part of the 1,850 square-kilometer KG basin block, KG-OSN-2001/3.
GSPC had earlier claimed that its KG basin fields have at least 20 trillion cubic feet (tcf) of gas reserves. The oil industry and ONGC refuted these estimates. Later, the Comptroller and Auditor General of India slammed GSPC in a report and said that as per the approved filed development report, DDW block’s gas-in place is 1.9 tcf of which 1.06 tcf is recoverable. The ONGC executive said the company expects 1 tcf of gas from the field.
GSPC has made nine discoveries in the Bay of Bengal block (KG-OSN-2001/3) of which three have been approved for development. Its Six Discoveries in the area are estimated to have gas-in-place of 8.39 tcf (only 1 tcf recoverable). ONGC and other investors will need to spend $1.5-2 billion to develop the DDW block, according to analysts. For GSPC to develop the Six Discoveries, the cost is seen to be between $4-8 billion.
GSPC has spent a whopping Rs 14,642 crore till March 2015 in the KG basin blocks, which exceeds the field development plan target of Rs 13,123 crore for just the DDW block. For the entire asset, which includes DDW Extension and Six Discoveries, an expense of Rs 19,576 crore was incurred till March 2015. Currently, the output from the block, which is under ‘test-production’, is hovering at less than 0.5 million metric standard cubic metres per day. GSPC is saddled with debts in excess of Rs 20,000 crore.