Gujarat state-owned firm wants LNG price for KG gas

After Reliance Industries Ltd, GSPC, the firm floated by Narendra Modi government, plans to sell natural gas from its KG basin fields at imported LNG rate of USD 14.2 per mmBtu.

In a nearly month-long, elaborate market price discovery exercise, Gujarat State Petroleum Corp (GSPC) found hoards of buyers willing to pay a rate equivalent to what India pays to Qatar for importing gas in its liquid form (LNG).

In all 37 companies put in as many as 53 bids for about 75 million standard cubic meters of gas per day, more than 14 times the peak output of 5.24 mmscmd GSPC's Deen Dayal West (DDW) gas field in block KG-OSN-2001/3, industry sources said.

The company had on February 25 asked bidders to quote a positive or a negative number to be added to India's liquefied natural gas (LNG) import formula of 12.67 per cent of Brent crude oil plus USD 0.26 per million British thermal unit.

GSPC prescribed a minimum sale price of USD 8.50 per mmBtu, at floor rate of USD 65 per barrel of oil.

Sources said demand far exceeding the supply was generated when the biddable variable was kept at zero. At cap oil price of USD 110 per barrel, the gas price translates into USD 14.2 per mmBtu.

The formula is the same on which RIL a year back sought price bids for sale of gas it will produce from its Sohagpur coal-bed methane (CBM) block in Madhya Pradesh.

While the Oil Ministry, under the then Oil Minister S Jaipal Reddy, held back the approval for RIL's CBM gas price discovery by putting repeat queries, it remains to be seen how GSPC's proposal will be treated by the Ministry under M Veerappa Moily.

Contractually, the government has to decide on the price discovered within 60 days. GSPC, which had also appointed an independent third party auditor to ensure that the price discovery is carried out in an open, transparent and arms length way, got bids on March 22 and is likely to submit a proposal to the ministry in next couple of days.
Phone calls made to GSPC Managing Director Tapan Ray for comments, went unanswered.

RIL too had got overwhelming response when over 70 bids totalling a demand of more than 90 mmscmd, several times more than the peak CBM output of 3.5 mmscmd, were received. Its proposal has however been languishing in the ministry for 13 months now.

Petronet LNG Ltd, of which Oil Secretary is the Chairman, pays RasGas of Qatar a price of 12.67 per cent of the average price of crude oil imported into Japan (called Japan Crude Cocktail, or JCC). Besides it incurs a USD 0.26 per mmBtu cost on transporting the gas in ships from the Gulf nation.

Both RIL and GSPC felt this is an arms-length pricing formula and called for bids from consumers on the same.

GSPC, owned by the Gujarat government, will produce a maximum of 5.24 mmscmd of gas from the offshore DDW gas field. The gas will land at Mallavaram, near Kakinada in Andhra Pradesh, and can be ferried to customers up to Gujarat through Reliance Gas Transportation Infrastructure Ltd's East-West pipeline.

It will charge an additional marketing margin of Rs 10.21 per mmBtu. The consumer will also have to bear all taxes, duties, levies on sale of gas as well as transportation cost and duties and taxes thereon.

RIL had also extended the CBM pricing formula for its eastern offshore KG-D6 gas when the current USD 4.205 per mmBtu rate expires in March 31, 2014.

While the Oil Ministry has accepted a complex international hub-based pricing formula suggested by the Rangarajan Committee for all gas produced in the country, the Production Sharing Contracts (PSC) signed by firms like RIL and GSPC provides for discovering gas price through competitive arms length basis.

Price of gas as per Rangarajan panel recommendation would come to USD 8-8.5 per mmBtu.

Great Eastern Energy Corp (GEECL) is selling CBM produced from its Raniganj block in West Bengal at USD 6.79 per mmBtu, while domestically produced natural gas is priced at USD 4.2 to USD 5.73 per mmBtu.

RIL had sought a marketing margin of USD 0.15 per mmBtu from CBM users, even though its USD 0.135 per mmBtu marketing margin charged on KG-D6 gas has been sent to oil regulator PNGRB for review.

Sources said the Oil Ministry was reluctant to approve the price sought by RIL as nowhere in the world is domestic gas priced at LNG rates.

RasGas of Qatar prices the 7.5 million tonnes a year (about 30 mmscmd) of gas it sells to Petronet LNG Ltd at 12.67 per cent of JCC. Another USD 0.26 per mmBtu is the cost it takes for shipping the gas cooled to turn it into liquid (called LNG) in cryogenic ships.

RIL adopted this formula and has sought pricing of its CBM as well as KG-D6 gas in line with it.

Now, GSPC too has adopted the formula and has changed JCC with widely quoted Brent crude oil.

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