Lower price will hurt gas industry: Bernsstein Research
India cannot afford to let lower natural gas price of $2.34 per mmBtu prevail as the rate will hinder development of a natural gas industry in the country, US-based Bernstein Research said in a latest report.
Today, India has among the lowest prices of natural gas in Asia. This may suit consumers who are fortunate enough to have supply, but does not reflect the scarcity of natural gas resources," the investment research firm said in its report dated September 11.
In its report titled 'Blood Brothers - There Can Only Be One Answer', Bernstein talked of the gas dispute between the Ambani brothers wherein younger Anil's Reliance Natural Resources Ltd is claiming gas from Mukesh's Reliance Industries at $2.34 per mmBtu, rates which are 44 per cent lower than the government price of $4.20 per mmBtu.
"Step aside Russia and Ukraine - this time it's serious! Its hard to recall a spat in the world of gas which has been as contentious and caught the public eye as much as the one between the Ambani brothers relating to the supply of gas from the giant Dhirubhai gas field in the KG basin," it said.
Endorsing RIL's KG-D6 field cost of $8.8 billion as "one of the lowest cost deepwater gas fields in the world", Bernstein said, "if the lower gas price of $2.34 per mmBtu is approved and applied to all gas produced from Dhirubhai, we estimate the full cycle IRR would be less than 3.3 per cent, which is below the cost of capital."
"The lower gas price (of $2.34 per mmBtu) calls into question the whole viability of the development of deepwater gas in India becuase of the precedent it sets," Bernstein said.
RIL's gas finding and development plus operating costs comes to "extremely competive" $10 per barrel. "Does this mean RIL will make exorbitant profits? The answer is no."
It said the full-cycle IRR on Dhirubhai assuming a gas price of $4.2 per mmBtu, was close to 25 per cent. "By comparision with other provinces, this is at the lower end of what would be expected for a deep water development and certainly commensurate with the exploration risk and technical challenges of the project."
Bernstein said India has one of the lowest prices of natural gas in Asia.
While state-run Oil and Natural Gas Corp (ONGC) sells gas at $2 per mmBtu, neighbouring China has doubled the rates to $4 per mmBtu in past 10 years.
"Rather than helping, low gas prices are hindering the development of a natural gas industry in India," it said.
"Given that deepwater gas supply would be the key to meeting domestic demand growth in India, any disruption to investment in the exploration and developmnet of the KG basin will slow down the supply of natural gas and increase India's demand for expensive imported crude oil and LNG," it added.
Bernstein said RIL would lose over $14 billion in revenue over a 15 year period if the lower price of $2.34 per mmBtu was to prevail.
"Moreover it will set lower expectations in the minds of other consumers on future gas prices and continue to dissuade international E&P majors from participating in India's gas boom," it said.
In five years, $4.2 per mmBtu rates would be cheap. "Although RNRL are right to seek the best price possible, we believe they should lock in as much natural gas at this price as they can and focus on developing their gas fired power business which is where the long term value lies," it said.
The research firm said the only regions with lower gas prices than India are Russia and the Middle East where domestic gas prices were between $1-2 per mmBtu. "Unlike India, these countries also have abundant gas reserves."
In case of Russia, state-run Gazprom has been forced to use profits from its gas export business to Europe to subsidise the loss making domestic gas supply. In the Middle East, low gas prices had also led to a lack of investment in regional gas exploration and promoted countries with abundant gas reserves to export gas as higher priced LNG rather than supplying regional markets, it said.
"The impact of this has been seen in gas shortages and power outages across Kuwait, UAE and Oman."
Source: business-standard.com
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India cannot afford to let lower natural gas price of $2.34 per mmBtu prevail as the rate will hinder development of a natural gas industry in the country, US-based Bernstein Research said in a latest report.
Today, India has among the lowest prices of natural gas in Asia. This may suit consumers who are fortunate enough to have supply, but does not reflect the scarcity of natural gas resources," the investment research firm said in its report dated September 11.
In its report titled 'Blood Brothers - There Can Only Be One Answer', Bernstein talked of the gas dispute between the Ambani brothers wherein younger Anil's Reliance Natural Resources Ltd is claiming gas from Mukesh's Reliance Industries at $2.34 per mmBtu, rates which are 44 per cent lower than the government price of $4.20 per mmBtu.
"Step aside Russia and Ukraine - this time it's serious! Its hard to recall a spat in the world of gas which has been as contentious and caught the public eye as much as the one between the Ambani brothers relating to the supply of gas from the giant Dhirubhai gas field in the KG basin," it said.
Endorsing RIL's KG-D6 field cost of $8.8 billion as "one of the lowest cost deepwater gas fields in the world", Bernstein said, "if the lower gas price of $2.34 per mmBtu is approved and applied to all gas produced from Dhirubhai, we estimate the full cycle IRR would be less than 3.3 per cent, which is below the cost of capital."
"The lower gas price (of $2.34 per mmBtu) calls into question the whole viability of the development of deepwater gas in India becuase of the precedent it sets," Bernstein said.
RIL's gas finding and development plus operating costs comes to "extremely competive" $10 per barrel. "Does this mean RIL will make exorbitant profits? The answer is no."
It said the full-cycle IRR on Dhirubhai assuming a gas price of $4.2 per mmBtu, was close to 25 per cent. "By comparision with other provinces, this is at the lower end of what would be expected for a deep water development and certainly commensurate with the exploration risk and technical challenges of the project."
Bernstein said India has one of the lowest prices of natural gas in Asia.
While state-run Oil and Natural Gas Corp (ONGC) sells gas at $2 per mmBtu, neighbouring China has doubled the rates to $4 per mmBtu in past 10 years.
"Rather than helping, low gas prices are hindering the development of a natural gas industry in India," it said.
"Given that deepwater gas supply would be the key to meeting domestic demand growth in India, any disruption to investment in the exploration and developmnet of the KG basin will slow down the supply of natural gas and increase India's demand for expensive imported crude oil and LNG," it added.
Bernstein said RIL would lose over $14 billion in revenue over a 15 year period if the lower price of $2.34 per mmBtu was to prevail.
"Moreover it will set lower expectations in the minds of other consumers on future gas prices and continue to dissuade international E&P majors from participating in India's gas boom," it said.
In five years, $4.2 per mmBtu rates would be cheap. "Although RNRL are right to seek the best price possible, we believe they should lock in as much natural gas at this price as they can and focus on developing their gas fired power business which is where the long term value lies," it said.
The research firm said the only regions with lower gas prices than India are Russia and the Middle East where domestic gas prices were between $1-2 per mmBtu. "Unlike India, these countries also have abundant gas reserves."
In case of Russia, state-run Gazprom has been forced to use profits from its gas export business to Europe to subsidise the loss making domestic gas supply. In the Middle East, low gas prices had also led to a lack of investment in regional gas exploration and promoted countries with abundant gas reserves to export gas as higher priced LNG rather than supplying regional markets, it said.
"The impact of this has been seen in gas shortages and power outages across Kuwait, UAE and Oman."
Source: business-standard.com
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