Higher rates will help increase domestic gas output: Moily

Defending the government decision to double natural gas prices from April next year, Oil Minister M Veerappa Moily today said higher rates will help raise domestic production and cut dependence on imports.

While the government had in June approved a new formula for pricing of all domestically produced natural gas, the Cabinet yesterday allowed the same principles to also be applied to Reliance Industries' currently producing fields in KG-D6 block subject to certain conditions.

"If you don't raise gas price, no domestic production will come and dependence on imports will increase," Moily said at the AIMA's 3rd PSU Summit here.

India, which currently imports half of its gas needs, has the hydrocarbon potential which require lot of money to exploit, he said. "You need to spend a lot of money on technology (to access the hydrocarbon) and research."

Higher gas price will help bring to production over 3 Trillion cubic feet of gas reserves that had been declared economically unviable at current rates of $4.2.

Several gas discoveries of firms like Oil and Natural Gas Corp (ONGC) as well as of RIL had been declared unviable by the Directorate General of Hydrocarbons (DGH) as current gas price of $4.2 per million British thermal unit was inadequate to cover the cost.

The Minister said the option before the country was to either keep the finds in the ground and continue importing gas at $12-13 or pay much lesser than this price to domestic producers to bring the discoveries to production and cut foreign exchange outgo on imports.

"We may end up importing 100% (of our needs) if we don't encourage exploration," Moily said.

The reserves in the discoveries not viable at current price equals the remaining resources in the currently producing Dhirubhai-1 and 3 (D1&D3) gas fields in RIL's eastern offshore KG-D6 block.

The Cabinet Committee on Economic Affairs on June 27 approved pricing of domestically produced gas at an average of imported LNG and international benchmarks from April 1 2014. Accordingly, the price in April would be about $8.4.

While the decision was to apply to all public and private producers of conventional gas and non-conventional fuel like coal-bed methane and shale gas, the decision was not notified as the Finance Ministry felt RIL should not get the benefit because it has in past three years produced less than targets.

The Cabinet Committee on Economic Affairs yesterday allowed RIL the new rates provided it gave a bank guarantee to cover its liability if gas-hoarding charges are proved.

The bank guarantee, which will be equivalent to the incremental revenue that RIL will get from the new gas price, will be encashed if it is proved that the company hoarded gas or deliberately suppressed production at the main Dhirubhai-1 and 3 (D1&D3) fields in KG-D6 block since 2010-11.

Moily said only if more cash is generated can it go into firming more oil and gas.

Officials said the finds whose commerciality has not approved by DGH are spread over RIL's KG basin KG-D6 block and Cauvery basin block CY-DWN-2001/2 off the Tamil Nadu coast.

In KG-D6, commerciality of D-5 and 18 had not been submitted due to low gas price, while Declaration of Commerciality (DoC) of D-29, 30 and 31, which hold around 350 billion cubic feet of reserves which can produce 5-7 million standard cubic meters per day, has not been approved by DGH.

Also, D-35 find in the Cauvery basin block CY-DWN-2001/2 holding 719 billion cubic feet of gas that could produce 4 mmsmcd of gas was declared commercially unviable with DGH on May 14 stating that "at a gas price of $4.2/MMBtu, revenue generated is not adequate to meet the costs".

In RIL's NEC-OSN-97/2 (NEC-25) block, two finds D-32 and 40, holding 663 billion cubic feet of reserves capable of producing over 4 mmscmd, has not been entertained by DGH.

Similarly, ONGC's several of discoveries in KG-DWN-98/2 blocks, which holds at least 3.56 Tcf of reserves, are unviable at $4.2. Its 16 billion cubic meters MDW-4A and 5 finds in Mahanadi basin MN-DWN-98/3 block faces similar fate.

Macquarie Research in a recent note said, "A hike (in gas price) could boost India's recoverable gas reserves manifold" and quoted global consultants IHS-CERA to say that the nation's producible gas resources will rise to 80 Tcf at $8 gas price.