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Making a strong pitch for market determined prices for natural gas, UK major BP Plc's India head has said most of gas discoveries in the country are unviable at current rate of $4.2.
Writing as co-chairman of CII's National Committee on Hydrocarbons, Sashi Mukundan told head of Parliament Standing Committee on Finance, Yashwant Sinha, that 27 trillion cubic feet of discovered gas resources or 9 fields of the size of Reliance Industries' KG-D6 fields, await being put on production.
"The very poor rate of conversion of discoveries into production is due to the fact that the prevailing price of gas makes most of these discoveries unviable," he wrote. "India, which is a largely gas-based geological province, has been curbing investments by mandating sub-market prices."
The panel, in its report to Parliament earlier this month, had flayed the government decision to approve the Rangarajan formula for pricing of gas that will double rates to $8.4 per million British thermal unit from April 2014, and wanted RIL to deliver shortfall in KG-D6 output at old prices.
Mukundan said India gives import parity or price prevalent in international markets, for oil produced in the country. At $100-110 per barrel oil price, gas-equivalent rate is $18 per mmBtu (similar to the LNG import price).
"Risks and costs involved in exploring and developing a gas field are the same as those in an oil field," he wrote.
"Neither the Government, nor the Board of any company can give the go ahead to develop discoveries that are non-commercial.
"Given the current gas price of $4.2, small, marginal and deep water discoveries made in the country will remain unproduced and demand will have to be met by importing LNG at over $13 per mmBtu with a disastrous impact on both the balance of payments and the subsidy outgo," he said.
Mukundan said many of the existing discoveries by various companies such as Gujarat State Petroleum Corp (GSPC), ONGC, RIL-BP and others become viable at the new price which could bring over 50 million standard cubic meters per day of new gas production on stream in 3-4 years.
He said subsidised LPG is sold in India at $12 per mmBtu, commercial LPG sells at $24. The price of CNG in New Delhi is $14 per mmBtu, while diesel (after subsidies) sells at $19.
"How then, can a price of $6.7 per mmBtu (based on Dr Rangarajan formula for the current quarter and estimated at $8.4 in April 2014) be considered high when crude oil produced under the same Production Sharing Contracts and similar industry costs, fetches $18 per mmBtu?," he asked.
Also, costs of setting up gas production facilities are not only higher, but also gas projects have far longer gestation periods.
BP India head said the New Exploration Licensing Policy
(NELP) recognised the need for gas-on-gas competition as vital to not just spur domestic production, but to integrate Indian gas markets with prices elsewhere.
"However, the tenets of NELP have been considerably diluted and the introduction of the Gas Utilisation Policy in 2008 has taken away the freedom given to Contractors to market gas... While the Rangarajan formula is not 'the' market price for gas, it is a step in the right direction to transition India to a deregulated gas market with marketing and pricing freedom," Mukundan said.
Clarity on this transition combined with a stable fiscal and policy framework and enabling decision making will generate a spurt in E&P activity, he said.
"Oil and gas production has remained stagnant in India because of low investor interest and difficulties encountered in monetising assets and bringing them rapidly into production.
"If India is to have a competitive oil and gas regime, then policy must be crafted in full appreciation of the relative prospectivity of Indian basins (compared with Qatar, Saudi Arabia, Brazil or US) and the lack of exploration because of the difficulties they present," he added.
Mukundan said only $20 billion has been invested in domestic oil and gas fields in past five years and Indian firms are finding it more fruitful to acquire acreages abroad.
"The return on investments made by Indian companies in oil and gas sector in foreign countries is far more attractive than in India," he said.
Since the government approved a price of $4.2 in 2007, prices of other commodities like crude, fuel oil, naphtha, liquid gas or LNG, imported coal have more than doubled.
"Today, the country is paying over $per mmBtu for imported LNG as compared to $3.86 in 2007," he said, giving details of price range of long-term liquefied natural gas (LNG) contracts of public sector firms that range between $12 to 15.5 per mmBtu.
"Given the price at which India is buying LNG, why should any investor choose to invest in India to produce and sell natural gas at an uneconomical price of $4.2 when he can invest overseas to produce the same gas and sell it at a far higher price into the Indian market?," he asked.
