Gas price hike to pull in big-ticket investments

The Reliance-BP combine is planning to invest $11 billion in 21 blocks in the next few years.

Written by Gireesh Chandra Prasad | New Delhi | Published: June 29, 2013 4:17 am

The government’s bold decision to double the price of natural gas price to $8.4 per unit from next fiscal is set to attract investments into the country’s gas sector not only from domestic energy majors but also from global businesses that see limited returns from the saturated North American gas market. Three major players — ONGC,Reliance Industries and Cairn India — have committed an investment of at least $20 billion over the next few years to pursue their big hydrocarbon projects with an emphasis on gas.

Executives from blue-chip gas producers told FE that doubling the gas price would strengthen their books,which will help them pursue capital-intensive exploration and production projects aggressively. The Reliance-BP combine is planning to invest $11 billion in 21 blocks in the next few years.

ONGC sources said the company will invest more than $5 billion in 13 “ambitious projects” that would yield an additional 40 million tonnes of oil and 64 billion cubic metres (bcm) of gas. Cairn India,which scripted a success story in oil exploration in Rajasthan,will invest $3 billion more in pursuing hydrocabon discoveries with an emphasis on gas which,at present,is very small in its output mix.

“We welcome this positive policy decision and development (of gas price revision). We firmly believe that it will give the Indian oil and gas industry the necessary incentive to explore for and develop new indigenous gas resources,necessary to fuel India’s future growth,” said a spokesperson for Cairn India.

Oil and gas fields are licensed to companies under one contract and they explore for both in the same field until they find either or both.

With gas price in India rising to $8.4 per million metric British thermal unit (mmBtu) from next year,compared to less than half its price in the US,a lot of businesses in the North American continent are likely to start eyeing India as an investment destination. “Besides,the new price approved also makes many small and marginal fields in India economically viable for exploration and development as Indian fields are generally difficult and are not high in prospectivity,” said an industry executive who did not wish to be named.

Credit rating agency Moody’s said on Friday that the higher revenues arising from higher gas price for ONGC and RIL should also encourage them to step up exploration and production activities in India.

“Increase in revenue can be higher over the next few years as production of domestic gas increases from new discoveries,with every billion cubic metre of gas produced resulting in incremental revenue of $150 million,” the agency said in a report. It expects ONGC’s revenues to increase by $1.5-2 billion and RIL’s by $300-500 million in 2014-15,based on its estimate of their gas production next fiscal. In 2012-13,ONGC and RIL had reported revenues of $29 billion and $73 billion,respectively.

The lack of a remunerative price for the strictly regulated gas business in India has so far been seen as the biggest impediment for investments in India’s gas business,unlike crude oil which producers are free to sell at market price. Finance minister P Chidambaram said on Friday that investments in the hydrocarbon sector has declined from $6.6 billion in 2007-08 to $1.8 billion in 2011-12,while Indian promoters’ investments abroad have gone up. In the last 10 years,Indian investment abroad in the hydrocarbon business has touched $27 billion and another $10 billion is in the pipeline. “The choice is to live without gas or to produce and use it. The third option to import LNG is not viable simply because we do not have the money to import,” Chidambaram told reporters.

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