ONGC bats for deregulation of gas market for prosperity of industry

Wants to put a cap on minimum price at $4.2 per mBtu in order to make most of its fields viable

Triggering a debate on the need for revising the current domestic natural gas price regime, Oil and Natural Gas Corporation Ltd (ONGC) Chairman Dinesh Kumar Sarraf on Thursday stated that deregulation of gas pricing and marketing rights is necessary in India for the exploration industry to prosper.

He said major challenge that the exploration sector is facing in a low pricing environment would be cost optimisation. With effect from April 1, the government has cut the natural gas price to $2.48 per million British thermal unit (mbtu), which will be effective for six months. Hence, companies had been batting for a cap on pricing of natural gas in India. As per the new gas pricing formula approved in October 2014, gas prices are to be revised every six months.

“One of the major challenges that we are facing in a low-price regime is cost optimisation, for which new technologies need to be implemented. In India deregulation of gas market is needed – this includes both gas prices and marketing rights,” Sarraf said addressing a Confederation of Indian Industry (CII) summit in Delhi. 

The state-run company accounts to 60 per cent of the country’s overall gas output, coming to around 90 million standard cubic meters per day.

Earlier in the day, Petroleum Minister Dharmendra Pradhan said that he understands the sentiments of the industry regarding a low price regime. Since this government took charge, it has given marketing freedom for deepwater blocks and small field auctions. He hinted that the government would look to clear the mess regarding pricing in the next two years.

In October 2014, after the Narendra Modi government took charge, it came up with a new pricing formulae taking a weighted average of rates at Henry Hub in the United States, National Balancing Point in the United Kingdom and rates in Alberta (Canada) and Russia. However, due to drop in international prices, the domestic natural gas prices too tanked to more than half. ONGC had been batting for a cap in minimum price at $4.2 per mmBtu, in order to make most of its fields viable.

While the average cost of production for Krishna Godavari basin is between $4.99 per mmBtu and $7.30 per mmBtu, this comes in between $3.8 a unit to $6.59 per unit for other basins. 

Key points:

1.  The current pricing formulae is by taking a weighted average of rates at Henry Hub in US, National Balancing Point in UK and rates in Alberta (Canada) and Russia. 

2. With effect from April 1, the government has cut the natural gas price to $2.48 per million British thermal unit (mbtu), which will be effective for six months. 

3. ONGC had been batting for a cap in minimum price at $4.2 per mmBtu, in order to make most of its fields viable.

4. While the average cost of production for Krishna Godavari basin is between $4.99 per mmBtu and $7.30 per mmBtu, this comes in between $3.8 a unit to $6.59 per unit for other basins.