Oil & gas companies hope govt will let market decide gas pricing.

NEW DELHI: The Narendra Modi government's oil minister will have to learn to swim in the deep end. Trillions of cubic feet of natural gas are trapped in deep-sea geological formations, only a small part of which have been tapped. The bigger chunk is waiting to be extracted and flow into factories and homes — if the price is right. Under the UPA regime, deep-sea fields have generated much more political heat than gas, which the country needs to fuel its expanding economy.

An estimated 64 trillion cubic feet (tcf) of natural gas is waiting to be discovered, almost as much as the 69 tcf of of proven and probable recoverable gas reserves discovered since 1950, according to a 2013 study by US-based consultancy IHS-Cambridge Energy Research Associates (CERA).

About 27 tcf of discoveries made so far are still to be developed, but this requires prices of at least $8 per unit for some discoveries and $10-12 for those in ultra-deep regions, according to IHS-CERA, which advises governments and companies globally. The higher the price, the greater the incentive for exploration. IHS -CERA anticipates discoveries of 24 tcf at a price of $8 and about 55 tcf at $12.

Gas reserves that have not been developed include fields discovered by India's top two exploration firms, state-run Oil and Natural Gas Corporation (ONGC) and Reliance Industries (RIL). While ONGC is yet produce any gas from deep-sea fields, RIL has pioneered India's efforts in producing natural gas from challenging terrains in the KG-D6 block, which saw the world's largest gas discovery in 2002.

It is also the most notable discovery of hydrocarbons in India — apart from Cairn India's Rajasthan oilfields — since the discovery of Bombay High decades ago. Producing oil and gas in such terrain is a high-risk and costly business. Oil industry executives frown at comparisons, made by the likes of Arvind Kejriwal's Aam Aadmi Party, with a discovered onshore field in Bangladesh, where Reliance's partner Niko sells gas for $2.3 per unit.

Exploration companies say that the deepsea is a totally different ball game, and to invest risk capital in such challenging conditions, exploration companies, including BP Plc, its partner Reliance, ONGC, and Cairn India, which found deep-sea hydrocarbons in Indian and Sri Lankan waters, demand regulatory clarity and reasonable returns. Analysts are almost unanimous that the new government will raise gas prices.

"Post election, we expect the new government to decide fast on the gas price issue (KG-D6 price/contracts expired on March 31). In our view, an easy way out would be to adopt the already notified Rangarajan formula," said a Nomura report. UBS is equally confident: "We expect the new government to notify the higher gas price shortly by June '14 as we believe (1) rationale of gas price has been well debated for developing new gas fields, (2) raising domestic production to offset imports of higher priced LNG."

Oil and gas producers, notably the RIL-BP combine, are asking the government to allow the market to set prices. The production sharing contract (PSC) mandates marketbased arms length pricing. All that the government needs to do, industry executives say, is to respect the PSC.

Former minister Suresh Prabhu, who is widely seen as close to Modi, points out that 48% of India's basins have not even been explored, and in the 52% that have been, India has not been able to produce oil and gas at optimum levels. India needs to step up investment in the sector because hydrocarbon imports drain foreign exchange and hurt the fiscal situation.

"We thus need to attract investment from both public and private sector to ensure we get away from the dubious distinction of helping the oil and gas exporting countries with unprecedented imports," said Prabhu. India's hunger for oil has grown in the past decade. Oil imports have jumped to $143.8 billion in 2013-14 from $18.3 billion in 2003-04 while LNG imports galloped to nearly 11 million tonnes from 0.25 million over the same period. ONGC chairman DK Sarraf is worried about gas fields lying idle.

"Without an increase in prices, it will be difficult to put those discoveries in production. We are importing liquefied natural gas at a high price. We need to be able to produce domestic gas, which will be viable at a lower price than LNG," said Sarraf. Nearly one-third of India's gas demand is met from imported LNG, which costs $12-15 per unit.

Sashi Mukundan, who heads BP Plc's Indian operations, bluntly says that nobody would invest in India at current prices. BP and its partner Reliance Industries, like ONGC, are also waiting for clarity in gas prices. The UPA government first announced new rates in June 2013, then decided to review it after a few days; in a few months it approved the same rates all over again, and said new prices would be implemented from April 1, 2014, subject to some conditions. The Election Commission vetoed higher gas prices after receiving a reference from the ministry.

Some of ONGC's fields would require gas prices to be about $10 per unit to make commercial sense. "Only a very limited amount of deep water discoveries are economic at $8/mmbtu. A price of $10/mmbtu and above is required to develop most of deep water, ultra-deep water and technically challenging shallow water discoveries.

Source : economictimes.indiatimes.com