Plentiful gas is not enough

ONGC's latest find in the Krishna Godavari (KG) basin, though yet to be certified by the directorate-general of hydrocarbons, could be just the good news that the state-owned enterprise is looking for, given how it has been compared poorly with newer private sector rivals like Reliance. According to a recent report by broking house CLSA, ONGC (including its subsidiary ONGC Videsh) is on its way to becoming one of the world's top 10 upstream players. Further, as a report in this newspaper has pointed out, ONGC's latest KG find, coming on top of Reliance Industries' own large find, means that the country's east coast may hold gas reserves of 100-200 trillion cubic feet (tcf), a number that puts India among the top 10-12 players globally.

Before anyone celebrates, it is important to bear some factors in mind. Unlike gas off the country's west coast, east coast gas is primarily methane and has to be converted into methanol if it is to be used as feedstock for petrochemicals or fertilisers. It can, of course, be freely used to fire power plants. More importantly, developing these gas fields will be neither easy nor cheap. ONGC's gas, for instance, is at a depth of around 3 km from the sea surface, after which 6-7 km of rock have to be drilled through to get the gas. While that adds substantially to cost, the practical problem is that the specialised oil rigs and large compressors required for such activity are not available in the market, having been contracted out to other users for three to four years. While working out costs in advance is always a tricky business (rig hire charges rose three-fold between 2003 and 2005), experts reckon that east coast gas could cost twice as much as west coast gas, if not more. This may not matter if energy prices stay high""which should be considered a safe bet because of the global demand-supply balance and rising demand from countries like China and India.

What is noteworthy is that, despite the large gas discoveries, no company has tied up long-term buyers for the gas; without such contracts, it is unlikely that these firms will be able to achieve financial closure on their gas projects. The government needs to do its bit for things to start moving. For one, natural gas needs to be put on the "declared" goods list, to ensure that states do not charge different sales taxes on its use, and a standard 4 per cent rate applies across the country. Gas pricing is another area where there is little clarity""the ministry of petroleum and natural gas recently turned down the contract between the two Ambani brothers on the supply of gas from this region (from Mukesh's gas fields to Anil's Uttar Pradesh power plant), leaving the pricing issue wide open. The same holds for pricing of electricity and the freedom of producers to sell power to anyone they choose (the "open access" issue). Until power producers have choice of end-customers, it is difficult to see how they will give firm usage guarantees to companies supplying gas from the KG basin. Indeed, much like what the ministry of power did in the case of the ultra-mega power projects, the two ministries of power and petroleum will have to sit together and iron out all such issues, including those of pipelines to transport this gas, before the power sector is ready to use this gas.