Economy
Demand for pooling price of imported and domestic gas

There is urgent need for a revision of gas prices to a realistic level and consequently, a revival of the idle gas-based power generating capacities in the process

 

Reliance Industries Ltd (RIL) and its partners, BP and Niko Resources, have decided to "go slow" on investment including proceeding with the R-cluster development project in the D6 block. R-cluster is a series of small fields in the block being developed together and they hope to obtain 5 mmscmd initially by 2017-18 and subsequently reach 10 mmscmd to the current output with R-cluster. At the moment, three producing fields in the block are D1, D3 and MA, whose total production is about 13.05 mmscmd.

 

It may be noted that the contractors in KG-D6 were planning to invest over $5 billion in the next three to five years in a series of projects to develop around 4 trillion cubic feet of gas discovered in the block. Delays in revising the price have set their plans in a limbo.

 

In the past, Oil Ministry was looking at a price level in the range of $6 to $6.50 per unit for domestic gas as against the earlier proposed price of $8.40. Neither the Directorate General of Hydrocarbons (DGH) could prove that the claim of "geographical surprises" by Reliance was false nor could it produce evidence to show that gas "exists" in the wells but the contractor did not want to draw it out!

 

There is no doubt that the NDA ministries have been working overtime to resolve this issue. Power Ministry has now renewed its demand for pooling the price of imported and domestic gas, so as to ensure gas-based power projects get a boost and much needed support.

 

This pooling refers to the weighted average of price of imported gas and domestic gas based on proportion of volume. Officials from Power, Petroleum and Natural gas will present their views to PMO. The outcome may not be immediately announced, and it is likely to be deferred for a fortnight, or so.

 

Data presented at various meetings indicate that about 5 tcf of gas is yet to be extracted from Reliance blocks in Krishna-Godavari and Mahanadi basins. It is reported that the officials feel that the Contractor (Reliance) would become eligible for charging the new price only after it makes up the shortfall of 1.9 tcf. Reliance can then get the higher price, when fixed, for about 2.5 tcf. Their claim is that the cost of production is $3 per unit and even at the price of $4.2 the contractor was making profits!

 

In so far as the power sector is concerned, they want gas at an "affordable" price and subsidy for the state distribution utilities to enable them to purchase electricity generated from gas-based plants. Electricity generated from gas costs not less than Rs5 per unit and the consumer gets it at about Rs6 to Rs7 per unit. As against this, electricity generated from coal-based units cost Rs3 to Rs3.50, which is sold to the consumer at Rs4 to Rs5.30.

 

As on 30th June, gas-based power generating plants total capacity was 21,211 MW. But they were actually operating at an average plant load of 23%. Thus, 77% of the production capacity remained idle. This is unaffordable in a country which is hungry for power. Out of this installed capacity, 6996.5 MW is totally or predominantly dependent upon D6 gas. This has been lying idle since the gas supplies stopped from March 2013.

 

Why did the Power Ministry not take the initiative to obtain the gas to keep the full capacity in operation? This is while knowing fully well that gas supplies from D6 were falling or slowing down.

 

It may be noted that the landed cost of imported gas from long term contract is $12 per mmBtu, while it is available at $13.5 to $14 to the user. LNG or imported gas, brought from the spot market is available at $10/$10.5 per mmBtu and the user buys it at $12.5 to $13. Set against these, the domestic gas price has been in the range of $4 to $5.7 per mmBtu. For the power plants it costs $7 to $8 per mmBtu after the addition of local taxes, market margins and transmission charges.

 

According to the power companies, every dollar increase in gas price will increase power costs by 45 paise per unit and the financial health of distribution utilities in the states may not allow them to purchase expensive electricity. This is because the ultimate consumer, the aam aadmi, cannot afford to pay the price!

 

Fixing the gas price, which will be applied to all the domestic producers, is a very difficult proposition. Yet this matter has to be resolved soon and a pooling arrangement looks, at least, practical.

 

In so far as Reliance is concerned, they need to be persuaded to continue their exploratory work in the country and continue their investment programme to obtain the much needed gas from R-cluster. As for the shortfall that has already occurred, the best solution would be for the government to fix the common approved price for the gas to be supplied, keeping a record of the "unsupplied" quantity in suspense. They need to have an independent, qualified consultant to carry out the investigation to find the actual situation - whether it was a geographical surprise or not. A penalty for non-supply has already been imposed on the company and what needs to be done is to find the truth of the matter. If there is no gas down in the wells, where would they get it from?

 

In the meanwhile, Reliance plans to invest $2 billion in the US in its shale assets, betting big on extracting both natural gas and oil from sedimentary rock formations in Marcellus region where the company has agreements with Chevron and Carrizo Oil and Gas Inc. Its production from shale business is about 15 mmscm of gas per day which is higher than its production of 8 mmscm of gas from D6 block in the KG Basin!

 

Power Ministry should now direct its energy in arranging for gas to be supplied to the power generating units which are having huge idle capacities.

 

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

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