KG D6 Block gas allocation: Implications and Benefits

The petroleum ministry has drawn up a matrix of sector-wise allocation of gas from RIL`s D-6 block along with the implications of such allocations, as well the benefits accruing to these sectors. The following are the details:

Fertiliser:

--Allocation: An allocation, equal to the requirement of 15.508 MMSCMD of gas, was made.

--Implications: The allocation was meant to meet the entire demand of the fertilizers sector, thus reducing fertiliser imports. Earlier, costlier liquid fuels and imported gas were being used for production. To note, fertilisers are sold at administered prices and the difference in selling price and the cost of production is borne by the government as subsidy, thus narrowing the gap would ease the pressure on the exchequer.

--Benefits: With this allocation, about 76 lakh tones of urea per annum will be produced. Also, government expenditure will be curtailed by about Rs.4,000 crore per annum.

Power:

--Allocation: An allocation of 43.165 MMSCMD was made.

--Implications: This allocation is expected not only to meet the entire demand of power sector, but also bring in efficiency to power plants that have been working sub-optimally so far; in particular, the four independent power projects (IPPs) in Andhra Pradesh (Konaseema, GVK, Gautami and GMR) which were ready since 2005, but were non-operational due to shortage of gas.

--Benefits: About 10,000 MW of power will be generated and a cost-reduction of about Rs.11,000 crore per annum is expected in the power sector.

LPG:

--Allocation: An allocation of 3 MMSCMD has been made.

--Implications: With this allocation, the entire demand in the LPG sector is expected to be met.

--Benefits: LPG production is expected to be pushed up by one crore LPG cylinders per annum, after KG basin gas is swapped with rich gas for LPG production

City Gas Distribution (CGD):

--Allocation: An allocation equal to the requirement of 2.83 MMSCMD has been made.

--Implications: This gas allocation is to meet the entire demand of the domestic and transport (CNG) sector.

--Benefits: A reduction in the cost of fuel used for domestic and transportation purposes is expected with this allocation. Benefits are expected to accrue to 30 lakh households and three lakh vehicles per day. Also, the reduction in cost to the consumers is estimated to be in excess of Rs.1,500 crore per annum.

Steel:

--Allocation: An allocation of 4.19 MMSCMD has been made.

--Implications: This quantity is expected to meet the entire demand of the gas-based steel sector. To note, these gas-based plants can not use any alternative fuel other than gas.

--Benefits: This allocation will lead to a saving of over Rs.1,000 crore per annum to the steel sector.

Petrochemicals:

--Allocation: An allocation of 1.918 MMSCMD was made, against a requirement of 14 MMSCMD, has been made.

--Implications: The allocated gas will be swapped with semi-rich gas which will be used as a feedstock in the petrochemical sector.

--Benefits: This swapping of allocated gas to semi-rich gas will result in the production of value added products (VAPs) like ethylene and propylene.

Refineries:

--Allocation: An allocation of 11 MMSCMD, against a requirement of 24.13 MMSCMD, has been made.

--Implications: This allocation will meet only 46% of the current demand of the refining sector.

--Benefits: This will lead to the replacement and conversion of the liquid fuels to value added products like HSD and gasoline. The estimated benefit to the refining sector is about Rs.3,000 crore per annum.

Captive Power:

--Allocation: An allocation of 10 MMSCMD has been made.

--Implications: Demand of captive power plants to be met only after the non-captive demand of public utilities and IPPs are met.

--Benefits: Generation of over 2,000 MW of power and a cost reduction of about Rs.2,500 crore per annum is estimated with the allocation.

Source: Energy Line India

 

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Gas Prices in India: A comparative Analysis

Where Does the KG D6 Gas Price of $4.2 per MMBTU Stand in the market?


Controversies have surrounded KG D6 gas, but RIL downplayed all:

Reliance Industries operated KG-DWN-98/3 gas field, also known as KG D6 has run into controversies immediately after the major gas find in 2002. Whether it is the quantum of the discovery, capital expenditure for the development, legal tussle with NTPC over the contractual  obligation or the Memorandum of Understanding (MOU) signed with Reliance Natural Resources (RNRL) for supplying 28 mmscmd gas, Reliance has witnessed numerous allegations.

RIL, however, has proven these accusations erroneous time and again. RIL had estimated the reserves of KG D6 block to the tune of 14 trillion cubic feet (tcf), which was downplayed by many to the maximum of 5-6 tcf. Today, with limited number of wells drilled, the commercially recoverable reserves are approved at 11.3 tcf by the Government. The in-place reserves are estimated to the extent of 40 tcf by various analysts. Similarly, the capital expenditure of $8.8 billion was said to be escalated. The Government, however, itself came forward in defense of the accusation arguing that the reserve estimates along with peak production level has doubled since the initial development plan resulting in increased capital cost due to three-fold rise in commodity prices, equipment prices, rig charges and engineering cost.

As far as NTPC issue is concern, RIL has made it clear that disagreement with NTPC is not on the price of $2.34 per mmbtu but on unlimited liability clause which coerces the RIL to pay for entire cost of substitute fuel in case of gas supply failure even in case of force-majeure   by the company. RIL only wants the penalty charges to be capped that too as low as half of what is applicable for NTPC in case of its inability to off-take the gas, which may force the RIL to flare a sizable amount of precious gas.

Even in case of RNRL, RIL agrees to supply the said quantity of gas at agreed price provided the Government consents on price and marketing freedom. In fact, RIL tried to get the Government certification for price of gas to be supplied to RNRL, however, the latter rejected the same, stating that the price did not match the arms-length criteria of pricing as per the Production Sharing Contract (PSC).

KG D6 gas price alleged to be unrealistic and too high to get buyers:
RNRL, annoyed with the Government decision, moved to court and made several allegations against RIL. The company also published all its allegations in the form of advertisement in almost all national news dailies for several days. Among others, one of the main accusation was that RIL was to making super normal profit by selling gas at $4.2 per mmbtu and that the price does not stand relevant at the time when gas prices has crashed by as much as 80% in international market. The Anil Ambani led company also claimed that RIL is unable to find customers at this price as the price is too high for the Indian market.


Is $4.2 per mmbtu a realistic price? Where does it stand in the market? 

In view of this, it becomes pertinent to investigate where the gas price of $4.2 per mmbtu stands in Indian and global market. Though, Anil Ambani group refers to sharp fall in international gas price, which is factually incorrect, as KG D-6 gas price is for long-term and does not get impacted significantly due to market forces.

Price of $4.2 per mmbtu cheaper than nearly all the domestic gas prices except for APM gas:

For a fair assessment, the price of $4.2 per mmbtu needs to be compared with prices of domestic gas from various fields. In the country, price of gas is lowest at $1.8 per mmbtu for APM fields operated by state-run ONGC and OIL. The Government is providing subsidized gas to fertilizer, power and City Gas Distribution sectors. Lately, ONGC and OIL has demanded the APM gas prices to be raised to $4.2 per mmbtu.

However, media report indicates that Government has agreed to a price hike of 44% or $2.6 per mmbtu. The second lowest gas price of $3.5 per mmbtu is for Ravva field operated by Cairn, which is up for revision from December, 2008. Bearing in mind the demand of gas in the country and market trend, revised gas price for Ravva field would not less than $5 per mmbtu, higher than KG D6 price.

Gas price for another Cairn operated field Ravva Satellite is already higher than KG D6 gas at $4.5 per mmbtu and is set for review along with Ravva. If media reports are to be believed, GAIL, the marketer of Ravva Satellite gas, had offered the price of $5.73 per mmbtu as soon as the price became due for revision, only to be rejected by the operator. Latest media reports suggest that Cairn has demanded the price of $6.75 per mmbtu from GAIL based on the price offered from an industrial unit. The demanded price is over 60% higher compared to KG D6 price.

Gas derived from Lakshmi field is priced at $4.75 per mmbtu whereas for Bheema and several fields operated by GSPC is set at $5 per mmbtu, well over $5 per mmbtu. Price for gas from Panna-Mukta and Tapti fields is highest in the country at present and is sold at $5.70 per mmbtu for quite some long now. This price is 35% more than the price for KG D-6 gas.

As far price of PLL’s long-term LNG, priced at $6.84 per mmbtu after the recent revision, is concerned, it is nealy 63% costlier than KG D6 gas price of $4.2 per mmbtu. From the evaluation of all the gas prices, present and near future, from various sources, in the domestic market, it is unambiguous that the gas price of $4.2 per mmbtu for KG D6 gas is cheapest gas available in the country, keeping aside the gas from APM fields. However, comparison with gas prices in the world market may provide a better idea of the relevance of $4.2 per mmbtu gas price.

Henry Hub gas price ranged between $5-8 per mmbtu during last five years, which is considerably above the $4.2 per mmbtu price:

Globally, gas prices at Henry Hub in Louisiana are considered as the benchmark. Price trend for past five years (from 2004 to 2009) at Henry Hub indicates that gas prices have broadly ranged between $5 per mmbtu to $8 per mmbtu during 2004-09. Gas prices shot up sharply above $13 per mmbtu in 2005 but eventually settled in the range of $5-8 per mmbtu. Gas prices at Henry Hub again surged to nearly $15 per mmbtu in 2008 on account of spiraling oil prices and huge gas demand, but crashed below $5 per mmbtu in 2009 due

to unprecedented recession in US market that resulted in gas prices declining well below $5 per  mmbtu. As the US was in recession and anticipated to come out of the same, the energy demand ultimately will also find the lost northward trend. The will in due course bring the gas prices back to the range $5-8 per mmbtu. Compared to the Henry Hub price range of $5-8 per mmbtu, KG D6 price of $4.2 per mmbtu for five years seems very competitive and indeed substantially lower. Hence, the $4.2 per mmbtu gas price stands relevant even by global standards.

Coming back to the domestic market, various fuels like Petrol, Diesel, LPG, Kerosene, Naphtha, Fuel Oil and Coal are being used for different purposes in households, automotives and industries.

All alternative fuel prices multiple times higher than that of $4.2 per mmbtu barring domestic coal:
Prices of four major petroleum products namely Petrol, Diesel, Kerosene and Domestic LPG is regulated by the Government and changed in larger public interest. Retail price of Rs. 48.76 per litre of Petrol in Mumbai (Rs. 4.69 per litre cheaper than the actual price) corresponds to $23.27 per mmbtu considering the calorific value of Petrol at 11,000 kcal per litre.

Addition of Rs. 4.69 per litre subsidy provided by the Government increases it to $25.51 per litre. Similarly, diesel price of Rs. 36.7 per litre (Rs. 3.09 cheaper than the actual price) with calorific value of 9800 kcal per litre translates to $19.66 per mmbtu. If the subsidy of Rs. 3.09 per litre is added into this, the price in energy terms increases to $21.32 per mmbtu.

Likewise, the highly subsidy Kerosene sold under Public Distribution System costs Rs. 9.01 per litre whereas the same for commercial purposes is priced at Rs. 25,280 per KL or Rs. 25.28 per litre in Mumbai. With energy content of 9500 kcal per litre, the price works out to $4.98 and $13.97 per mmbtu respectively. Similarly, the price of 14.2 kg Domestic LPG cylinder of Rs. 312.76 per kg, with calorific value of 11,200 kcal/kg, corresponds to $9.88 per mmbtu, which with the addition of Rs 158.55 subsidy becomes $14.89 per mmbtu. Price of 19.2 kg commercial LPG cylinder of Rs. 695.7 or Rs. 36.23 per kg, works out to $16.26 per mmbtu. 


Market prices of Fuel Oil and Naphtha at Rs. 24,910 per tonne or Rs. 24.91 per kg and Rs. 35,920 or Rs. 35.92 per kg, with calorific value of 10,440 and 11,200 per kg respectively, works out to price of $12.53 and 16.84 per mmbtu respectively.   


Prices of all these petroleum products, with or without Government subsidies, are beyond the KG D6 gas price of $4.2 per mmbtu. Nearest among all, is the subsidized price of Kerosene at $4.98 per mmbtu which is well over $4.2 per mmbtu price. Exclusion of subsidy from the Kerosene price makes it over three times than that of KG D6 gas price. Similarly, swelling subsidy on domestic LPG also couldn’t bring the prices more than double compared to KG D-6 gas price. Commercial price of LPG, in fact, is several times more than Kg D-6 gas price of $4.2 per mmbtu. However, price of domestic as well as imported coal, with calorific value of 3500 and 5800 kcal per kg respectively, at Rs. 1,200 per tonne or Rs. 1.2 per kg and Rs. 4080 or Rs. 4.08 per kg, translates to $1.8 and 3.69 per mmbtu respectively, which are significantly lower than $4.2 price of gas. Nonetheless, the adverse environmental effects of coal makes KG D-6 gas a better choice. 


KG D-6 Gas – Most Realistic and Competitive fuel price in the market:

Finally, the gas price of $4.2 per mmbtu appear not only highly competitive and comparable to domestic gas prices and RLNG, but also lower than average price of gas in international market. The price is also considerably lower than other substitute fuels in the domestic market. Undoubtedly, the Empowered Group of Ministers seems to have worked thoroughly to make the KG D6 price realistic and acceptable. Therefore, the seeds of doubts being raised by Anil Ambani company about the KG D6 gas price appear irrelevant and have grown from personal animosity.

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RIL asks govt for additional allocations

Reliance Industries Ltd (RIL) has again asked the government to make additional gas allocations from its D6 block to new customers like captive power plants in order to help it ramp up production, which is currently constrained by a lower offtake.

“KG-D6 currently has a capacity to produce more than 60 million metric standard cubic metre a day (mmscmd) and this will increase to 80 mmscmd shortly… We once again request you to make additional allocations to these customers, which will enable us to increase production,” RIL President (gas business) R P Sharma said in a letter to the petroleum ministry.

RIL said there are several captive power plants already connected to the pipeline network, which can consume 8-10 mmscmd gas. A letter dated September 8 also requested the government to extend the contracting priority for supply of D6 gas to power sector customers to five years and at 90 percent plant load factor from the current 60-70 per cent due to increased gas availability.

It also asked for conversion of 11 mmscmd gas to power plants under firm allocations from the current fallback arrangement. As per the gas utilisation policy, the government has allocated 15.1 mmscmd to fertiliser plants, 3 mmscmd to the liquefied petroleum gas extraction plants, 18 mmscmd to power sector, 0.83 mmscmd to city gas distribution projects and 3.75 mmscmd to steel plants.
Source:B.S
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Decision regarding sale of Natural Gas by NELP contractors and order of Priority to supply gas from RIL’s kg D6 field

Empowered Group of Ministers (EGoM) had been constituted to examine issues relating to pricing and commercial utilization of gas under New Exploration Licensing Policy (NELP). The issues relating to pricing were decided earlier by the EGoM. The EGoM meeting was held on 28.5.2008 to deliberate upon issues pertaining to commercial utilization of natural gas.

The following guidelines for sale of natural gas by NELP contractors have been approved:-
i) Contractors would sell gas from NELP to consumers in accordance with the marketing priorities determined by the Government. The sale would be on the basis of formula for determining the price as approved by the Government.
ii) Consumers belonging to any of the priority sectors should be in a position to actually consume gas as and when it becomes available. So the marketing priority does not entail any ‘reservation’ of gas. It implies that in case consumers in a particular sector, which is higher in priority, are not in a position to take gas when it becomes available, it would go to the sector which is next in order of priority.
iii) In case of default by a consumer under a particular priority sector and further in the event of alternative consumers not being available in the same sector, the gas will be offered by Contractor to other consumers in the next order of priority.
iv) The priority for supply of gas from a particular source would be applicable only amongst those customers who are connected to existing and available pipeline network connected to the source. So if there is a marginal or small field that is not connected to a big pipeline network, then the Contractor would be allowed to sell the gas to customers who are connected or can be connected to the field in a relatively short period (of say three to six months).
v) The priority would not impact the process of price discovery whenever it is undertaken, as all the customers would participate in the price discovery process (as already decided by the EGoM) and would be eligible for utilizing natural gas subject to priority.
vi) Since the supply situation is expected to increase substantially in the near future in view of increased availability from domestic sources and imported gas (LNG/ transnational pipelines), these guidelines would be applicable for the next 5 years after which they would be reviewed.

The production of natural gas from RIL's KG D6 field is expected to commence from September 2008 and will initially be about 25 mmscmd. It is further expected that the production would gradually increase to 40 mmscmd by March 2009. The EGoM decided that this gas should be supplied in the following order of priority:
i) Existing gas based urea plants, which are now getting gas below their full requirement, would be supplied gas so as to enable full capacity utilization.
ii. A maximum quantity of 3 mmscmd would be supplied to existing gas based LPG plants.
iii. Up to 18 mmscmd natural gas, being the partial requirement of gas-based power plants lying idle/under-utilized and likely to be commissioned during 2008-09, and liquid fuel plants, which are now running on liquid fuel and could switch over to natural gas, would be supplied to power plants.
iv. A maximum quantity of 5 mmscmd would be made available to City Gas Distribution projects for supply of Piped Natural Gas (PNG) to households and Compressed Natural Gas (CNG) in transport sector.
v) Any additional gas available, beyond categories i) to iv) above, would be supplied to existing gas-based power plants, as their requirement is more than 18 mmscmd.

The marketing freedom given to Contractors under NELP would be subject to the order of priority given in para 3 above and the guidelines given in para 2 above.

The decision would benefit 22 natural gas-based urea plants in the country, as natural gas is the ideal feedstock for production of urea and, due to the shortfall in gas availability in the country, these plants have to use costlier alternate fuels like naphtha and fuel oil. Supply of gas for production of LPG would be greatly beneficial as about 25% of our present requirement is met by imports. The LPG requirement in the country is expected to further go up in the coming years because of continuing enrolment. Supply of natural gas to power plants would result in utilization of idle assets and cheaper incremental cost of power on account of better utilization of existing assets. Gas-based power plants handle peak loads very well and they are also preferred for environmental considerations. Supply of city gas as a clean and cheap fuel for use of domestic purpose has become a vital necessity for the urban dwellers. Presently the country has 12 cities with more than 25 lakhs population. It is proposed that all cities with population of more than 25 lakhs will be connected within 3 years. Further, cities with population between 10 to 25 lakhs will be covered in a phased manner.