Once again, Oil and Natural Gas Corporation [ONGC] – a Government of India [GOI] undertaking in the upstream oil and gas segment which accounts for over 70% of indigenous gas production of 80 million standard cubic meter per day [mmscmd] – has raised a hue and cry over the existing guidelines for pricing of natural gas.
ONGC Chairman, Dinesh K Sarraf has argued that current natural gas price being significantly lower than the cost of production, for any company it does not make economic or commercial sense to invest in new fields or augmenting production from existing ones through fresh investment. He has requested ministry of petroleum and natural gas [MPNG] to review the existing domestic gas pricing formula and provide for a floor at least to the level of earlier APM [regulated] price US$ 4.2 per million British thermal unit [mBtu]/non-APM price US$ 4.2-5.25 per mBtu fixed in June, 2010.
About six months back, ONGC along with Oil India Limited [OIL] – another GOI undertaking operating fields in Assam – had raised an alarm when from October 1, 2016, the government had reduced the price by 18% to US$ 2.78 per mBtu on net calorific value [NCV] basis. Then also, the duo had demanded a ‘floor’ below which price should not be allowed to go. The price has since been further reduced to US$ 2.75 per mBtu effective from April 1, 2017.
Under the new guidelines for gas pricing in vogue since November 1, 2014, the price is based on a weighted average of prices at 4 global locations viz., Henry Hub [USA], NBP [National Balancing Point] [UK], AGR [Alberta Gas Reference] [Canada] and Russian price for a full year three months prior to the effective date of revision. The price is revised bi-annually [once in 6 months]. The current price is half of US$ 5.61 per mBtu it was on November 1, 2014.
The guidelines were introduced in response to a clamor among exploration and production [E&P] companies [ONGC/OIL included] that the government should debunk the archaic system of administered pricing and move towards market based mechanism. Modi – dispensation did precisely that by adopting a formula-based approach. Why should now ONGC ask for a floor price which will tantamount to return of administrative control?
The cost of production as reported by ONGC is US$ 3.59 per mBtu. This is for supplies from fields that are over three decades old wherein initial investments have already been amortized. One wonders whether for arriving at cost, capital spend on new fields has been included. If yes, this is untenable. Further, alongside gas price, cost of equipment and services has also plummeted. Has that been captured? Remove these anomalies, cost would be much less!
Even taking cost on face value, for 18 months since new pricing regime came in to force, the formula based price viz. November 1, 2014: US$ 5.61 per mBtu; April 1, 2015: US$ 5.18 per mBtu; October 1, 2015: US$ 4.24 per mBtu was significantly higher than production cost. Even from April 1, 2016, the price at US$ 3.39 per mBtu was more or less close to cost at US$ 3.59 per mBtu. To enjoy merrily when the going is good and start crying hoarse when things turn bad is patently unjust.
ONGC has opined that investment in new fields will be un-viable under the formula. If, the reference is to gas from deep/ultra-deep water and high pressure–high temperature [HPHT] areas [e.g. KG-DWN-98/2] which involve higher capital spend, this aspect has already been addressed by government. For such fields, in March, 2016, it had issued guidelines to give an incentive price using a formula based on price of alternate fuels. That price is almost double the normal price.
Be it investment in a new field or augmentation of production from an existing field, the most crucial aspect in assessing its viability is the quantum of gas production. If, the target level of production can be achieved then, even with a price of US$ 2.75 per mBtu, the company can generate enough revenue to make the field viable. On the other hand, if production is less then, any level of price howsoever high will fail to make it viable. The proof of pudding is in eating.
The KG-DWN-98/3 [or KG-D6 in short] operated by Reliance Industries Limited [RIL] was granted a price of US$ 4.2 per mBtu when it commenced production in 2009 for a period of 5 years. This was 80% higher than the price of US$ 2.34 per mBtu offered by itself under competitive bidding for supplies to National Thermal Power Corporation [NTPC] for latter’s power plant in 2004.
Yet, it got in to trouble primarily because as against initially estimated in-place reserves of 12 trillion cubic feet [tcf] and recoverable reserve [RR] of 10-11 tcf, the in-place reserves turned out to be 2.9 tcf and corresponding RR of 1.9 tcf. As result, as against the commitment to produce 80 million standard cubic metre per day [mmscmd], it is currently producing only 10 mmscmd.
Likewise, for KG-DWN-98/2, as per original declaration of commerciality [DoC] submitted by ONGC, it had 1.7 tcf of in-place reserves and RR 1.2 tcf. But, according to a report by De-Golyer and MacNaughthon [November, 2015] – a consultant appointed by Union government to assess alleged migration of gas from KG-DWN-98/2 to KG-D6 of RIL – it has RR of only 0.5 tcf. Consequently, its production will be much less than target 16 mmscmd.
In view of above, none of the arguments given by ONGC for revision in price are tenable. The formula-based pricing provides a ‘stable’ and ‘conducive’ policy environment and has in-built incentives for E&P companies to make requisite investment. They need to focus on increasing return by maximizing production and reducing cost instead of clamoring for price hike ad infinitum.
In October, 2016, MPNG minister, Dharmendra Pradhan had rejected the demand made by ONGC/OIL. He must not acquiesce even now.