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Gas & Substance: New gas price to boost ONGC,OIL bottom lines if govt doesn’t play spoilsport

Kumar said the new pricing methodology will encourage the company to undertake aggressive exploration.

Written by Pranav Nambiar | Published: July 17, 2013 4:02:54 am

The government has recently doubled domestic natural gas price from $4.2 per million British thermal unit (mmBtu) to about $8.4/mmBtu,effective April next. Though the price will vary quarterly,depending on international crude prices,this is a positive development for oil PSUs like ONGC and Oil India (OIL). However,this may not translate into gains if the government siphons off profits from the price hike as subsidy contribution from the oil PSUs.

Oil companies say the new gas pricing methodology will open up more opportunities to explore hydrocarbon resources,especially in deep water fields where the production cost is considerably higher than in the case of onshore or shallow water blocks.

The new gas pricing formula will also unlock reserves of around 3-5 trillion cubic feet (tcf) in fields which were previously non-viable for production,according to oil ministry estimates. A ministry official said several gas finds were not being developed by oil companies as they were commercially non-viable at a price of $4.2/mmBtu.

ONGC will be amongst the largest beneficiaries as some of its discoveries were not granted declaration of commerciality (DOC) approvals. This includes finds in its KG-DWN-98/2 blocks,MDW-4A off the Paradeep coast and Mahanadi basin MN-DWN-98/3 blocks.

More than 65% of the domestic gas production (including Administered Price Mechanism gas) comes from state firms ONGC and OIL India. APM gas constitutes about 60% of current domestic production of about 110 million standard cubic metres per day (mmscmd). RIL produces about 14 mmscmd of gas.

AK Banerjee,director-finance at ONGC,said that if the price of gas is increased by $1/mmBtu,it will have a positive impact on the company’s net profits by more than R2,000 crore annually. “The higher prices will help us monetise our gas reserves and this will be a boost for us”,he said.

Oil India Ltd (OIL) director-finance K Ananth Kumar said the new pricing methodology will encourage the company to undertake aggressive exploration. At present the company produces primarily from onshore blocks,and the price revision will act as a stimulus to place a larger thrust on offshore blocks. Every one dollar gas price hike will boost the company’s top line by R400 crore and bottom line by R250 crore.

RIL will also see some of its previously non-viable discoveries turning viable under the new methodology. This includes discoveries in the Cauvery Basin and the Krishna-Godavari basin. However,an RIL official said that with its gas production dipping considerably,the company expects benefits to roll out post-2017 when its other fields like D-55 (RIL’s latest find in the KG D6 basin) begin producing gas. RIL,which had hit a peak output of 69.43 mmscmd from KG-D6 block in March 2010,is currently producing just over 14 mmscmd. This output is way short of the 80 mmscmd target for this year. The overall shortage of gas produced since 2009-10,based on targets,stands at 122.77 mmscmd.

The Cabinet committee on economic affairs on June 27 approved the pricing of domestically produced gas at an average of imported LNG price and international benchmarks like the Japanese crude cocktail (JCC).

Banerjee says ONGC is likely to go into more frontier and deepwater areas,as prices look more attractive now. A Motilal Oswal report notes that ONGC has more than 50 % of the total NELP exploration acreage allotted. Of this,around 66% acreage is in high potential deep water.

“As a bulk of this acreage is yet to be explored,there is a huge potential for hydrocarbon discoveries. ONGC has met with initial success in the KG block —the country’s first ultra-deep water discovery…we expect the company to report more oil and gas finds,going forward,” the report said.

The various types of gas resources available in India—including onshore,offshore shallow,offshore deep,and offshore ultra deep—have distinct commercial thresholds based on geologic structures and the technology needed to extract the gas. According to an IHS-CERA report,12 major basins in India show potential for a further

64 tcf of risked recoverable resources yet-to-be-found (YTF) through further exploration. The report adds that

24 tcf of India’s expected 64 tcf gas was economically viable at a price of $8/mmBtu.

At the domestic price of $8/mmBtu,India will be importing about 68% of gas while at around $12/mmBtu the import dependence will come down to around 24%—a huge boost for the energy sector where gap between demand and supply is increasing.

A senior ONGC official requesting anonymity said that it is impossible to put one price tag for gas produced from all the blocks. “Around $8/mmBtu price is a good price for deepwater blocks,but anything less than $5.85-$6/mmBtu is not viable for shallow water blocks,” he said. ONGC’s average costs of production from various blocks stands at around $3.6/mmBtu.

The investments in exploration and development (E&P) have consistently declined from $6 billion in 2007-08 to around $1.8 bn in 2011-12. During the same period,Indian companies invested $27 bn in the exploration and production sector abroad and another $10 bn investment is in the pipeline.

The opportunity cost of not producing domestically is significant. With dwindling production,the country has now become increasingly reliant on gas imports . The cheapest international sources of gas that sell at $3-$4/mmBtu in local markets of the US will end up at a landed cost of at least $10-$11 in India. About 9% of India’s electricity generation capacity is based on natural gas.

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