ONGC agrees to remove marketing margin, but refuses to lower gas price

State-owned Oil and Natural Gas Corporation (ONGC) has agreed to do away with charging users a marketing margin on the gas it plans to produce from its KG basin field but refused to lower the minimum rate, according to tender documents.

ONGC, India's top oil and gas producer, last month sought bids for sale of initial 2 million standard cubic meters per day of gas from its KG-DWN-98/2 block (KG-D5).

The company asked bidders to quote a rate linked to prevailing Brent crude oil prices. It fixed the floor or minimum rate at 10.5 per cent of the three-month average Brent crude oil price. On top of it, the firm sought USD 0.20 per million British thermal unit.

Potential bidders however opposed the levy of the marketing margin as well as the "high" floor price.

Responding to queries raised by bidders, ONGC said the floor price cannot be changed but marketing margin is being dropped.

"Change in Reserve Gas Price (floor rate) is not agreed. However, considering requests from various bidders, the levy of marketing margin of USD 0.20 per mmBtu over and above contract price is removed," it said.

At the current Brent crude oil price of close to USD 70, the minimum price comes to USD 7.3 per million British thermal unit.

This price, however, will be subject to the ceiling or cap fixed by the government for deepsea fields every six months. The cap for six months beginning April 1 is USD 3.62 per mmBtu.

This essentially means that bidders may corner gas by offering to pay USD 7, but the buyers will have to pay no more than the ceiling price of USD 3.62.

ONGC in the tender offered to sell 2 mmscmd of gas for a duration of 3 to 5 years at Odalarevu in East Godavari district of Andhra Pradesh, which is connected to state gas utility GAIL's KG basin pipeline network as well as PIL's East West Pipeline which is connected to KG basin network and further to Gujarat gas grid.

"Bidder is required to quote 'P', which would be the slope to Dated Brent Price. This slope should be more than or equal to 10.5 per cent," the tender document said adding that 'P' can be made in the increment of 0.1 per cent."

Gas price (in USD per mmBtu) "shall be the lower of the quoted slope (per cent) * Dated Brent Price or notified ceiling price during the period," it said.

The auction is to be conducted next week.

In pre-bid meetings, bidders raised the issue of high reserve price.

Bid prices starting from 10.5 per cent of dated Brent price must be revised downwards so as to account for cheaper alternatives available from other LNG terminals, according to a bidder query posted on the ONGC tender document.

Another bidder said, "Regarding the pricing formula, it is of our view that the starting slope to dated Brent price at 10.5 per cent is quite a higher side. Crude oil demand is going to recover this year and it is going to increase in short. In other domestic gas tenders from KG-D6 (2 years back) was also linkage with brend however the slope was very low ie 8.5 per cent."

"Also our gas consumption points are in western and northern part of India and the location of the gas field on eastern side also adds up transportation cost of multiple transporters. Considering the above factors, we request for a reduction in slope."

Yet another bidder said, in view of outcomes of the recent domestic auctions, and further in consideration of the higher transportation costs in evacuating gas to west and north India, request is that the reserve gas price be changed to 9.5 per cent of Dated Brent Price.

"In the current global/local gas market scenarios with improved market priced domestic gas availability, spot LNG with endless flexibilities matching specific requirements of customers, uncertainty of demand and affordability of small scale manufacturing sector, proposed Reserve Gas Price of 10.5 per cent is not reflective of current market reality," another bidder said.

"Also, in the instant case, considering marketing margin of USD 0.20 per mmBtu on GCV basis plus Rs 16.14 transportation tariff of KG basin pipeline network up to PIL interconnect point, the Reserve Gas Price works out to be more than 11 per cent. In view of above, ONGC is requested to consider pragmatic gas reserve gas price of 8.5 per cent offering win-win proposition to ONGC and prospective bidders," the bidder added.

In the bid document, ONGC said the marketing margin was to cover the cost of marketing and it does not form a part of the ceiling gas price.

Gas supplies from the block, which sits next to Reliance Industries Ltd's KG-D6 block in Bay of Bengal, is to start from end-June.

Earlier this month, Reliance Industries Ltd and its partner BP Plc of UK sold 5.5 mmscmd of additional natural gas from KG-D6 at a rate linked to Platts JKM (Japan Korea marker) - the liquefied natural gas (LNG) benchmark price assessment for spot physical cargoes.

The lowest bid that can be placed is JKM minus USD 0.3 per million British thermal unit. The highest acceptable bid would be JKM plus USD 2.01 per mmBtu.

This is the same benchmark RIL-BP had used in February to sell out 7.5 mmscmd of gas from the block.

ONGC's KG-DWN-98/2 or KG-D5 block is expected to have a peak production rate of 15.25 mmscmd of natural gas and 80,000 barrels per day of oil.

The company is likely to come out with another tender later this year for the sale of 5 mmscmd of gas from next year.