Deposits of natural gas in the country’s difficult geographies, worth Rs 1.8 lakh crore, could get to be exploited over a 15-year period, unlocking investments in the sector by the likes of ONGC, Reliance Industries and GSPC, which have for long sat tight on such reserves citing non-remunerative prices.
Deposits of natural gas in the country’s difficult geographies, worth Rs 1.8 lakh crore, could get to be exploited over a 15-year period, unlocking investments in the sector by the likes of ONGC, Reliance Industries and GSPC, which have for long sat tight on such reserves citing non-remunerative prices. While unveiling a package of policy incentives for the domestic hydrocarbon sector on Thursday, the Modi government gave “marketing and pricing freedom” for new gas production from deepwater, ultra deepwater and high-pressure-high-temperature areas, subject to a ceiling price derived from landed costs of alternative fuels such as fuel oil, naphtha, LNG and coal.
Officials said given the current prices of these substitute fuels, gas from difficult areas could be sold at around $7/mmBtu.
The current notified price for domestic gas is $3.82/mBtu (come April, this regulated price will fall further to $3-3.2).
Recorded gas reserves in difficult areas are currently pegged at 6.75 trillion cubic feet (tcf) including state-run ONGC’s 4.5 tcf and GSPC’s (Gujarat State Petroleum Corporation) 1 tcf. This estimate excludes RIL’s untapped KG-D6 assets and some 10 other notified discoveries whose potentials are yet to be established. While the company was tight-lipped, sources indicated that RIL may also get to sell gas extracted from untapped portions of KG-D6 assets — outside D1 and D3 blocks currently producing — at the higher price. However, it may have to withdraw the arbitration case slapped on the government in May, 2014 on KG-D6.
Analysts said the higher pricing power would help reverse the declining trend of India’s gas production — the output has fallen precipitously from 52.22 billion cubic metre (bcm) in FY11 to 33.6 bcm in FY15 and 27.1 bcm in April-January this fiscal.
Thursday’s decisions by the Cabinet Committee on Economic Affairs (CCEA) also included the ushering in of the following: a Hydrocarbon Exploration Licensing Policy (HELP), which will cover all hydrocarbons, i.e. oil, gas, coal bed methane etc. under a single license and policy framework; contracts based on “biddable revenue sharing,” an Open Acreage Licensing Policy that would allow companies to seek exploration of any block not part of the areas earmarked by the government; a concessional royalty regime and a easier extension of the existing contracts for fuller exploitation of the reserves. These steps will stimulate investments, reduce the country’s costly reliance on imports – more than three-fourths of India’s oil requirements and about a third of gas demand are currently met by imports- and boost its energy security.
ONGC chairman & managing director Dinesh K Sarraf told FE the explorer would now look forward to aggressively developing its deep-water block on the east coast (The PSU’s KG-D5 asset is estimated at 3.5 tcf and Mahanadi reserves at close to 1 tcf. “The CCEA decision will help us immensely. We will soon work out an investment proposal for the East Coast block.” A BP spokesperson said: “BP welcomes the reforms announced by the Government of India today for the hydrocarbon sector… It demonstrates the government’s firm intent to transform the oil and gas sector and enhance import substitution. We believe this should help unlock the development of existing gas discoveries, and encourage additional exploration. It will also lead to the development of a competitive gas market in the country.”
The government said in a press release: “The ceiling price (for gas from difficult areas) shall be calculated as, lowest of the (i) landed price of imported fuel oil (ii) weighted average import landed price of substitute fuels (namely coal, fuel oil and naphtha) (iii) landed price of imported LNG. The weighted average import landed price of substitute fuels in (ii) above will be defined as: 0.3 x price of coal + 0.4 x price of fuel oil + 0.3 x price of naphtha.” An official source told FE that if the formula is applied, the likely ceiling price would now be $7.08/mBtu, which is the lowest of the current landed prices of fuel oil ($7.21), LNG ($8.13) and weighted average price of naphtha, fuel oil and coal ($7.08).
Stating that the extant Production Sharing Contracts (PSCs) based on the principle of “profit sharing” gave a lot of discretion to the government and was a major source of delays and disputes, the CCEA said in the HELP regime, instead, the bidders would be required to quote the revenue to be shared with the government. “They will quote a different share at two levels of revenue called “lower revenue point” and “higher revenue point”. Revenue share for intermediate points will be calculated by linear interpolation. The bidder giving the highest net present value of revenue share to the government, as per transparent methodology, will get the maximum marks under this parameter.”
In the revenue-sharing regime, the government’s remuneration will be de-linked from the quantum of investment made in developing the block and extracting the hydrocarbons.
“A concessional royalty regime will be implemented for deep water and ultra-deep water areas. These areas shall not have any royalty for the first seven years, and thereafter shall have a concessional royalty of 5% (in deep water areas) and 2% (in ultra-deep water areas),” the government said.
PSC Extension for fields
The CCEA also approved a policy for grant of extension to the production sharing contracts for small and medium sized discovered fields. The government share of Profit Petroleum during the extended period of contract shall be 10% higher for both small and medium sized fields, than the share as calculated using the normal PSC provisions in any year during the extended period and hence will vary from year to year based on Investment Multiple (IM) /Post Tax Rate of Return (PTRR). During the extended period of Contract, the royalty and cess shall be payable at prevailing rates (of nomination regime). This will lead to additional revenue of Rs 2,890 crore on account of extra royalty and cess to the government.