ONGC Wants Higher Gas Price to Produce KG Basin, Kutch Discoveries

Government of India in October 2014 had evolved a new pricing formula using rates prevalent in gas surplus nations like the US, Canada and Russia to determine rates in a net importing country.

While prices have halved to USD 2.89 since the formula was implemented, the government has allowed a higher rate of USD 6.3 per mmBtu for gas fields in difficult areas like deepsea.

The official said the Krishna Godavari basin block KG- OWN-2004/1 is in shallow water and does not qualify as a 'difficult field'.

On the western side, the block GK-28 in Gulf of Kutch is a nomination block which does not qualify for higher rates, he said.

While the KG block will produce a peak output of 5.35 million standard cubic meters per day, the same from Gulf of Kutch block will be around 3  million metric standard cubic meters per day (MMSCMD). It would take a minimum three years to bring the gas finds to production.

The combined output is about 14 percent of the ONGC's current output of 60 MMSCMD.

"If we don't get the right price, it will not be possible for us to develop the two projects. If we are forced to do so, it would be like putting in a huge amount of money without expecting the same to return," the official said.

He said the KG block discoveries are in a water depth of just about 8-meters, developing which is costly since ultra- shallow rigs are scarce and therefore expensive.

ONGC also has a couple of smaller fields with a total expected peak production of 1.1 MMSCMD, which cannot viably produce at the current domestic gas prices.

The official said the company was in the process of preparing field development plans for all these fields but will go slow if the prices are not viable.

For more than a year now, ONGC has been petitioning the Oil Ministry for setting a floor price of at least USD 4.2 per MMBtu for domestically produced natural gas.

The new formula provides for revising rates every six months — on April 1 and October 1, based on one-year average gas price in the surplus nations with a lag of one quarter.

When the formula was implemented, rates went up from USD 4.2 to USD 5.05 per MMBtu but fell to USD 4.66 per MMBtu in April 2015 and to USD 3.82 in October that year.

In 2016, the prices further dipped to USD 3.06 per MMBtu in April and to USD 2.50 per MMBtu in October. In April this year, they fell further to USD 2.48 but have from October 2017 risen to USD 2.89.

Oil Minister Dharmendra Pradhan, in a written reply to a question in the Lok Sabha on March 20, had stated that the cost of production of natural gas in the prolific Krishna Godavari basin is between USD 4.99 to USD 7.30 per MMBtu.

The same for other basins is in the range of USD 3.80 to USD 6.59 per MMBtu, he had said, adding the production costs of companies vary from field to field depending upon the size of the reservoir, location, logistics and availability of surface facilities.

State-owned Oil and Natural Gas Corp (ONGC) has sought more than doubling of natural gas prices to help bring significant discoveries in KG basin and Gulf of Kutch to production.

Gas discoveries in the shallow sea off Andhra Pradesh on the east, and off Gujarat on the west are economically unviable to produce at the current government-mandated price of USD 2.89 per million British thermal unit, a senior company official said.

The company wants a price of over USD 6 per MMBtu to help it produce the gas without suffering any losses. In the absence of a viable gas price, it will have to mothball the USD 1.5-billion projects, he added.

"We have made representation to the government that the current price is not enough to make the discoveries viable. We have sought special pricing dispensation," he said.