Lack of pricing clarity clouds natural gas sector

K Ravichandran from ICRA says there is no clarity whether announcement pertains to existing discoveries or future discoveries

Finance Minister Arun Jaitley’s announcement that the government was considering allowing market-determined prices for natural gas has not enthused industry players.  The minister had said in the Budget on Monday, “A proposal is under consideration for new discoveries and areas which are yet to commence production — first, to provide calibrated marketing freedom and, second, to do so at a pre-determined ceiling price to be discovered on the principle of landed price of alternative fuels.”

Exploration and production companies — including state-run Oil and Natural Gas Corporation (ONGC), Reliance Industries and Gujarat State Petroleum Corporation — are all sitting on promising discoveries in the Krishna-Godavari Basin that are not commercially viable for development at current gas prices. Currently, gas producers get $3.82 per million British thermal unit (mBtu), based on a formula linked to a basket of gas prices. The price is reviewed every six months.
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K Ravichandran, senior vice-president, co-head, corporate sector ratings, ICRA Ltd, said, “There is no clarity if the announcement pertains to existing discoveries or future discoveries. Besides, clarity is required with regard to the proposal of providing marketing freedom at a pre-determined ceiling price to be discovered on the principle of landed price of alternative fuels. The formula needs to be spelt out.”

Gas pricing has been a big challenge in India. Both private and state-run upstream companies have said gas produced from blocks in deep waters and at high-temperature and high-pressure areas should be allowed to be sold at a premium. Last August, Minister for Oil and Natural Gas Dharmendra Pradhan had said the ministry was working on a formula for a premium on gas prices.

“When we declared the last pricing formula, we committed to give additional premium. Gas, which is produced in difficult areas (ultra-deep water and deep water), will get the premium. We will be publishing the premium formula shortly,” Pradhan had said.

ONGC was planning to invest up to $10 billion in its D5 block in the KG basin.

An ONGC official said the government should take a considerate view of players producing oil and gas in their own nation than spending dollars on importing. Premium would be given only on new discoveries.  “Public or private, we are all Indian companies and I think the government should incentivise us if we are investing billions of dollars, helping the nation’s economy. Low prices will make production from deep-water and ultra-deep water (blocks) unviable,” the official added.

Upstream players said this was the right time for players to make investments as costs were down. “After a few years, when oil prices will go up again, investments will be difficult. But if we invest now, we can reap the benefits a few years down the line,” said the chairman and managing director a national exploration and production company.