GAIL to buy coal-bed methane gas from Essar in West Bengal at $8 per unit

State-run GAIL (India) has won a contract for buying coal-bed methane (CBM) gas produced from Essar Oil’s Raniganj block in West Bengal. The gas will be supplied based on the three-month daily average price of Brent crude oil, which works out to around $8 per million British thermal unit (mBtU) now.

Based on current prices, the 15-year contract will be around Rs 7 billion on an annual basis. 

This comes a few months after Reliance Industries (RIL), which began commercial production of CBM from its two blocks in Madhya Pradesh,  started buying CBM at around $7.8 mBtu. 

Essar’s price is more than double the price of domestic natural gas set by the government till March 2018, which is $2.89 per mBtu. Great Eastern Energy and Oil and Natural Gas Corporation are the only CBM producers other than RIL and Essar.

GAIL has outbid other contenders like Matix Fertilisers, Graphite India and Positron Energy to buy CBM gas from Essar Oil and Gas Exploration and Production. 

“GAIL won the bid offering to pay gas prices that will be linked to the three months’ daily average price of Brent crude,” confirmed a source. This is a favourable price compared to the current imported liquefied natural gas price of $11.5 per mBtu.

In March last year, the government had allowed marketing and pricing freedom to CBM producers. At present, CBM is being sold at prices ranging from $3.4-15.5 per unit in the country. Many CBM players were not producing due to lack of clarity over pricing till then. 

Essar has invested about Rs 40 billion so far in the Raniganj East CBM block towards drilling wells, setting up supply infrastructure and laying customer pipelines to Durgapur and nearby industrial areas. The block has 348 completed CBM wells, alongside gas and water handling capacity. The company had recently stated that it was planning to drill more than 500 wells in line with the block’s field development plan. The company aims to increase the production from 1 mscmd (million standard cubic metres per day) to 2.3 mscmd soon.

In FY17, India produced 564.6 mscm of CBM, up 43 per cent compared to 392. 9 mscm India produced in FY16.

CBM is the natural gas stored in coal seams. Data available with the Directorate General of Hydrocarbons says India has the fifth-largest proven coal reserves in the world and, hence, its CBM potential is high.

At present, Essar owns CBM rights for five blocks — including Raniganj in West Bengal, Talcher and Ib Valley in Odisha, Sohagpur in Madhya Pradesh, and Rajmahal in Jharkhand. Looking into the production numbers of FY17, Raniganj East block by Essar is the largest producer of CBM in India with 385 mscm, followed by Raniganj South field by GEECL at 169.6 mscm and Sohagpur West by RIL at 6.3 mscm. 

Interestingly, both the coal ministry and the petroleum ministry are at loggerheads over the rights of CBM as it overlaps with conventional coal resources in some blocks. “A solution in this regard on sharing of coal assets for CBM extracts with the coal ministry and Coal India is being worked out,” a source said.

The government had formulated CBM policy in 1997. Under that, 33 exploration blocks were awarded. Out of these, 14 are operational, 15 are under relinquishment and five have been relinquished. Out of 14 operational blocks, five are under production or incidental production.