While finance minister Arun Jaitley announced a plan in the Budget to provide gradual marketing freedom and higher pricing power to producers of natural gas from unexploited difficult areas, whether existing such fields like ONGC’s KG-D5 asset would also get these incentives along with the to-be-auctioned ones is uncertain. The petroleum ministry, sources said, will approach the Cabinet Committee of Economic Affairs (CCEA) soon with different options on how the new regime could be defined.
The production-sharing (PSC) contract for ONGC’s deep-water KG-D5 block (with proven reserves of 3.5 trillion cubic feet (tcf) in the northern part itself) was signed in 2000 almost simultaneously with the PSC for Reliance Industries’ much-touted KG-D6 block. However, while RIL started producing in 2009, ONGC hasn’t commenced exploitation of its asset as yet, though it unveiled plans to invest $6-7 billion in the block and is targeting to start production from 2018-19.
What necessitated the need for the Budget proposal to be vetted by the Cabinet again at the instance of the petroleum ministry is that while Jaitley said the proposed regime of higher pricing and marketing freedom would apply to difficult areas “presently not exploited on account of higher costs and higher risks”, the petroleum ministry had never thought that blocks already allocated will get the leeway. If Jaitley’s proposal is implemented, ONGC’s Mahanadi block (put on the back burner) and GSPC’s Deen Dayal West (with marginal output) asset — both yet to go on stream — would also be incentivised.
The petroleum ministry, however, feels that if the benefit of higher gas price is accorded to these blocks, it would be unfair to RIL which had invested $9 billion in the KG-D6 block. Since RIL’s block is under exploitation, it seems it would be ineligible for the new pricing regime proposed in the Budget.
While the price of locally produced gas is now regulated, marketing and pricing freedoms are being made available to blocks to be auctioned in future. Marginal fields to be auctioned will also have pricing leeway.
The price of domestic natural gas is currently decided based on a formula approved by the Modi government in October 2014, which is linked to select global indices.
Effective October 1, 2015, the rates fell to $3.82 per million British thermal units (mBtu) till March 31, 2016, on gross calorific value (GCV), against $4.66/mBtu in the previous six months.
“The petroleum ministry would place before CCEA two issues — whether marketing freedom will be given to currently producing blocks as well as the ones to commence production. The government has already decided in principle to offer marketing freedom for hydrocarbon blocks to be auctioned in the future,” a senior government official privy to the development told FE.
The gas fields in the country could be broadly categorised into three types: Producing (RIL, KG-D6), under development/expected-to-commence production (ONGC, KG-DWN-98/2) and others including nominated areas with predetermined pricing mechanism.
Lamenting the situation of “rising demand, near-stagnation in production and consequent rapid increase in imports”, Jaitley said there was a need to incentivise gas production from deep-water, ultra deep-water and high-pressure-high-temperature areas. “A proposal is under consideration for new discoveries and areas which are yet to commence production, first, to provide calibrated marketing freedom; and second, to do so at a predetermined ceiling price to be discovered on the principle of landed price of alternative fuels,” he said.
On October 18, 2014, the CCEA held out a promise to investors in the hydrocarbon sector such as RIL, BP, ONGC and GSPC, who were unhappy with the quantum of price increase the formula allowed (the price is now lower than before the new formula applied) that sufficient incentives would be available for developing geologically difficult gas fields. “The latest proposal to be sent to the CCEA by the petroleum ministry is also likely to bring clarity on the premium gas pricing issue,” said a government official. Petroleum minister Dharmendra Pradhan refused to comment on the issue after the Budget.
Dinesh K Sarraf, chairman and managing director of ONGC, has said that these are “tough” times to start production from deep-water blocks at current price scenarios. At the same time, production from the RIL-operated once-prolific KG-D6 area on the east coast would cease by 2020. This is primarily because the existing fields are drying up faster and the explorer is not spending for development of newer area in absence of ‘remunerative’ gas prices.