Oil and Natural Gas Corporation (ONGC) has called on buyers to bid for natural gas from the deepwater fields of the KGDWN-98/2 block off of the east coast of India. ONGC is set to supply about 2 Million Metric Standard Cubic Metres per Day (MMSCMD) of natural gas from the fields starting at the end of June. We examine the importance and impact of this development.
Why is this important?
The ramping up of production from the KG-DWN 98/2 block by ONGC is a key component of the government’s plan to boost domestic production with the block expected to reach peak production of 15 MMSCMD by 2024. This would account for about a 20 per cent increase above the company’s current production level of about 70 MMSCMD. Natural gas production from the Krishna Godavari basin is a key part of India’s plans to reduce import dependence by boosting domestic production. The R cluster, satellite cluster and MJ fields operated by Reliance and British Petroleum in the Krishna Godavari basin are also expected to add 30 MMSCMD of natural gas production to India’s total production by 2023. India currently imports about half of its natural gas requirements of 175 MMSCMD.
What is the offer for sale?
ONGC has invited offers for the sale of natural gas from the block for three to five-year terms with the gas to be delivered at Odalarevu onshore terminal in Andhra Pradesh. Potential buyers will be required to quote a price indexed to the price of Brent crude. However, the price payable by buyers will be capped at a maximum of $3.62 per million Metric British Thermal Units (MMBTu) for the six month period starting in April in line with prices for domestically produced natural gas set by the government.
The government had in March kept the domestically produced natural gas $1.79 per MMBTu and reduced the ceiling price of natural gas from deepwater and ultra-deepwater fields to $3.62 from $4.06 per MMBTu for the April – September period. Upstream players including ONGC have called on the government to revise the formula for the calculation of domestic gas prices as current prices are forcing ONGC to sell a majority of its gas production at a loss.
Sources at ONGC told The Indian Express that the company’s average cost of production for natural gas was between $3.5 – $4.0 per MMBTu.