BP head Dudley & RIL chairman Ambani feel interim arrangement being considered by govt inadequate

Reliance Industries (RIL) and British energy major BP, equal partners in a joint venture to source and market natural gas in India, on Monday knocked at the doors of Prime Minister Manmohan Singh and other decision-makers in their quest for a clear road map for market-driven gas pricing. Bob Dudley, group chief executive and director, BP, and RIL chairman Mukesh Ambani pleaded their case for clarity on gas pricing, saying it was a must before future investment plans for exploration could be rolled out.

The price of natural gas produced in the KG D6 fields off the Andhra coast is slated for review by an empowered group of ministers (EGoM) in 2014; the current price of $4.2/mmbtu was fixed in 2007 and has been in force for a five-year period starting 2009.

Monday?s discussions ? Ambani and Dudley also met with Montek Singh Ahluwalia, deputy chairman of the Planning Commission and petroleum secretary Vivek Rae ? are significant in light of the fact that production of gas at the KG D6 basin has dropped to 15.5 million standard cubic metres (mmscmd), the lowest level since D1&D3 started production in April 2009, and are way below the peak of 69.43 mmscmd achieved in March 2010.

The two chiefs maintained that a recommendation by the Rangarajan Committee to double the price of natural gas price to $8-8.5 per mmBtu would be inadequate to bring high-risk deep-sea discoveries to production.

A panel headed by C Rangarajan, chairman of the Prime Minister?s Economic Advisory Council, has observed that the current price for domestic gas was out of sync with global rates and suggested an interim ?hybrid producer price? derived by averaging international hub prices with cost of imported liquefied natural gas (LNG) for the next five years.

As per the committee?s formula, the price works out to $8-8.5 per mmbtu as opposed to $4.2 per mmbtu that BP-RIL get for gas from its eastern offshore KG-D6 fields. The RIL-BP combine believes the price is at a discount of 30-40% to the existing free market price of imported LNG into India though consuming sectors including power and fertiliser remain apprehensive of such a sharp rise in the price of gas.

An increase of $1/mmbtu in the price of gas will push up RIL?s Ebitda (earnings before interest depreciation and tax) in FY15 by Rs 800 crore, analysts estimate. The jump for ONGC would be Rs 4,200 crore while for Oil India it would be Rs 540 crore. A higher remuneration for gas could also help RIL monetise offshore discoveries ? NEC-25, R Series and satellite fields.

Dudley also briefed the PM and others about the investments that BP and RIL intended to make in satellite gas fields in the KG-D6 block as also in converting discoveries in eastern offshore NEC-25 block to production. ?We are the largest investor in India and we have come to review the progress of our plans,? the BP head said adding that his company was ?very pleased? with the events that allowed the firm to drill an exploration well on the currently producing fields in KG-D6 block well after the expiry of exploration phase.

He said there may be ?promising indications of resources? in the well drilled 2 km below the currently producing Dhirubhai-1 & 3 fields and BP-RIL were also ?discussing plans for R-Series satellite development?.

Ahluwalia told reporters BP and RIL were very concerned and keen that the government take a view soon. ?That process is underway. I wasn?t able to tell him what we are going to decide. I did say that there is an EGoM and it will be considering the committee?s recommendations,? he added. In February 2011, BP entered into an agreement with RIL agreeing to pay an aggregate $7.2 billion for a 30% stake in 23 oil and gas blocks in India including the KG-D6 basin. Future performance payments of up to $1.8 billion could be paid based on exploration success that results in the development of commercial discoveries. These payments and combined investments, BP said, could amount to $20 billion.