Commercial thresholds of gas business would vary according to the nature of reserves. Inadequate price for domestic price could hit consumers also as they would have to rely on imports, which would most likely be costlier, in a high-demand situation.
In the final part of our series on India?s fuel economy, FE draws attention to the demand for differential pricing of gas
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The Reliance-BP combine believes that even doubling domestic prices from the present administered $ 4.2/mmBtu as recommended by the Rangarajan Committee would be inadequate to bring high-risk deep sea discoveries to production.
On the other hand, state-run ONGC and OIL are prepared to settle within a price band that is around the committee?s recommendation, partly because of the nature of their gas reserves. Various types of gas resources available in India, including onshore, offshore shallow, offshore deep, and offshore ultra deep have distinct commercial thresholds based on geologic structures and the technology needed to extract the gas.
An IHS CERA report commissioned by BP points that at a price of $8/mmBtu, only onshore and some offshore gas will be economically viable. It predicts that in 2025, at the domestic price of $8/mmbtu, India will be importing about 68% of gas, while at around $12/mmbtu the import dependence will come down to around 24%.
A senior ONGC official told FE that rather than putting one price tag for gas produced from all types of blocks, a differential pricing mechanism will be more feasible. ?The $8/mmBtu price is good for deep-water blocks, but anything less than $5.85-$6/mmBtu is not viable for shallow water blocks. However, $4.2 is a good enough price for onshore blocks,? he said. The cost of production across blocks for ONGC on an average stands at $3.6 mmBtu.
Sunjoy Joshi, director of the Observer Research Foundation, said that it would be ideal to allow market forces to determine prices. ?Since it takes at least 5 years after discovery to start production, fixing prices well ahead of time is counterproductive in a dynamic sector. Also a free market is important to understand what a benchmark price is to ensure that imports are not over-priced in India, he added.
GSPCL for instance, is seeking an approval from the oil ministry for a pricing formula at its KG Basin – Deen Dayal West block ? where the base price works out to be $8.5/mmBtu. During an e-auction held recently, it received 34 bids for a price of over $8.5/mmBtu.
While the total gas available is only 5.24 mmscmd, GSPCL received bids for 35.96 mmscmd of gas. The block is expected to start producing gas later this year. ?This (the response to GSPCL tender) shows that there is huge demand for gas in the country at the price above the current government administered price of $4.2/mmbtu. The GSPL price is also lower than the import price of LNG at $13 mmbtu or the spot and short term LNG prices which hover in the $15-18/mmbtu range,? said DJ Pandian, non-executive director of GSPC.
TK Ananth Kumar, director (finance), at Oil India (OIL), said that if India has to encourage more investments in exploration activity and secure India’s energy security, it is vital to increase prices above the $4.2-mmBtu level. Though OIL can continue to produce at $4.2 mmBtu due to its largely onshore presence, it will not make enough money to explore offshore blocks at these prices, he said. ?With OIL now getting into deep water and shallow water exploration, both as operator and non-operator, $7-$8/mmBtu would be more appropriate going ahead,? Kumar said.
Tim Hemsted, MD, Upstream Consulting, IHSGlobal, said globally pricing plays a big factor when companies make decisions on oil and gas exploration. In India, as most gas prospects are found in offshore blocks, the current pricing regime will not attract enough investors, he added.
The IHS report shows that 12 major basins in India show potential for a further 64 Tcf of risked recoverable resources yet to be found (YTF) through further exploration. Only 24 tcf of India?s expected 64 trillion cubic feet (tcf) of gas was economically viable at a price of $8/mmBtu. The opportunity cost of not producing domestically is also significant. With dwindling production in India, the country has now become increasingly reliant on gas imports and is expected to become a net importer soon.
The cheapest international sources of gas that sell at $3-$4/mmBtu in local markets of US will end up at a landed cost of at least $11-$12 in India, higher than what the Rangarajan panel has recommended. Spot and short-term LNG prices hover in the $15-18/mmbtu range.
GAIL India has booked 2.3 million tonnes of liquefied natural gas (LNG) production capacity in the US, but this is not expected to reach India before 2017. The sharp rise in LNG demand from much larger economies such as Japan and China limits the ability of developing countries like India to source LNG. Qatar, Australia, Nigeria and Mozambique could become major suppliers to India in the coming years. Qatar has already entered into long-term contracts with India.
Experts said there are enough buyers at higher prices from a range of sectors including power, fertiliser, steel CGD, LPG, petrochemicals. Gas-starved companies have now been forced to import through long-term contracts and spot contracts that are priced as high as $16 mmBtu.
However, the government will be walking on a tight rope with two critical sectors, namely the fertiliser and power sectors, up in arms against the Rangarajan committee?s proposal. Analysts said the power sector will have the most at stake with several gas-fired projects lying idle. The government could also be staring at a larger fertiliser subsidy bill if higher prices are passed on.
(Concluded)
