In line with new govt rules, Reliance re-auctions gas from its KG-D6 block

Reliance Industries Ltd and its partner bp plc have re-launched an auction for sale of natural gas from their eastern offshore KG-D6 block after incorporating the government's new marketing rules to give CNG-selling city gas companies first priority over supplies.

Reliance and its partner BP Exploration (Alpha) Ltd (BPEAL) will sell 6 million standard cubic meters per day of gas in an e-auction planned for April 3, a tender notice said. The price is indexed to the global LNG marker, JKM but will be subject to the government-notified ceiling price.

The partners had originally planned the auction in January but days before that the Ministry of Petroleum and Natural Gas, on January 13, published new rules for the sale and resale of gas produced from discoveries in deep sea, ultra-deep water and high-pressure-high temperature areas.

This led to the auction being suspended and is now being re-launched after incorporating changes.

Gas produced from wells drilled below seabed is used to produce electricity, make fertiliser or turned into CNG for powering automobiles or piped to household kitchens for cooking as well as in industries.

The new government rules require bidders to state upfront if they were purchasing the gas through the auction for 'own use as end consumers (including for use of their group entities) or as a trader.

While end consumers were allowed to resale any unconsumed gas, traders participating in the auction were allowed to resell subject to a maximum trading margin of Rs 200 per thousand cubic meters.

"In any situation, which may require proportionate distribution of the gas offered under the bidding process, the contractor (company selling the gas) shall offer gas to bidders belonging to CNG (transport)/PNG (domestic) sector, fertilizer, LPG and power sector in that order," the ministry had said, adding any leftover gas shall be offered to other bidders.

Besides incorporating the changes in their tender, Reliance and bp have increased the duration of supply contract to 5 years instead of 3 years offering the January auction.

Supplies are to start from April 16, the tender said.

City gas distributors selling CNG for the transport sector and piped natural gas to households kitchens will get top priority in allocation of gas in case of tie for any bids, followed by fertilizer, power plants and end consumers/traders in that order, it said.

In the January auction, the gas was intended for sale to end consumers who were not permitted to resale any unconsumed gas. Also, there was no clarity on the participation of traders.

The two partners have now invited bids for the sale of 6 mmscmd (million metric standard cubic meter per day), or a third of the volumes being produced at KG-D6, starting April 16, 2023, according to the tender document.

Users such as city gas operators that convert gas into CNG for sale to automobiles and pipe it to household kitchens for cooking purposes, or power plants that use it to generate electricity, or fertilizer units that use it to make urea, have been asked to quote a premium they are willing to pay over the JKM price.

JKM is the Northeast Asian spot price index for LNG delivered ex-ship to Japan and Korea. JKM price for May is around USD 13.5 per million British thermal unit.

Bidders have been asked to quote variable 'V' in the gas price formula 'JKM + V'.

The starting bid for 'V' was initially set at USD (minus) 0.30 per mmBtu but later changed to USD (minus) 0.42.

Each bidder was required to enter bids that were higher than or equal to the starting bid quote, the tender document said.

The maximum valid bid for 'V' was initially put at USD 5.01 per mmBtu but later changed to USD 2.01, beyond which the bid shall not be accepted by the e-bidding portal.

The gas price will be lower from the government-set ceiling price for gas produced from deep sea fields or the price arrived at the bidding. The ceiling price for six months ending March 31, 2023 is USD 12.46 per mmBtu and not likely to change much for the next six-month period.

In May last year, Reliance-bp had auctioned 5.5 mmscmd of incremental gas from the newer discoveries in the KG-D6 block, benchmarking it to the same JKM gas marker.

Three-fourths of that volume was picked up by Reliance and its affiliates. The price discovered in that e-auction came at a USD 0.06 discount to the JKM (Japan-Korea Marker) LNG price.

Prior to that, the duo had sold 7.5 mmscmd of gas at a discount of USD 0.18 per mmBtu to JKM.

The government sets a cap or ceiling rate at which natural gas from difficult fields like deep sea can be sold. This cap for the period from October 1, 2022 to March 31, 2023 is USD 12.46 per mmBtu.

Reliance has so far made 19 gas discoveries in the KG-D6 block. Of these, D-1 and D-3 -- the largest among the lot -- were brought into production in April 2009, and MA, the only oilfield in the block, was put into production in September 2008.

While the MA field stopped producing in September 2018, output from D-1 and D-3 ceased in February 2020.

Since then, Reliance-bp is investing USD 5 billion in bringing to production three deep water gas projects in block KG-D6 -- R-Cluster, Satellites Cluster, and MJ -- which together are expected to meet about 15 per cent of India's gas demand by 2023.