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India allows free pricing of natural gas for new projects

GAS

Giving in to a long-standing demand, the Indian government has allowed new gas producers to enter into negotiated pricing deals with their customers subject to certain ceiling tariff.

At present, gas prices are fixed by the government through a formula.

The policy guidelines would be applicable to future discoveries as well as existing discoveries which are yet to commence commercial production as on 1.1.2016.

For existing and producing fields, such as Reliance and BP’s KG D6, the current system will remain in effect.

For new projects too, a formula will still be used, but only for imposing a cap. “Theh government will not interfere in the price fixation for every block covered under the policy,” it said.

According to the new natural gas pricing formula of the Indian government, the ceiling price in US $ per mmbtu (GCV) shall be the lowest of the following three measures — (i) Fuel oil import landed price (ii) Weighted average import landed price of substitute fuels (0.3 x price of coal + 0.4 x price of fuel oil + 0.3 x price of naphtha) and (iii) LNG import landed price.

The government said the decision is expected to improve the viability of some of the discoveries already made in such areas and also would lead to monetization of future discoveries as well.

“The reserves which are expected to get monetized are of the order of 6.75 tcf or 190 BCM or around 35 mmscmd considering a production profile of 15 years. The associated reserves are valued at 28.35 Billion USD (1,80,000 Crore),” it said.

The country’s present gas production is around 90 mmscmd. Besides, these there are around 10 discoveries which have been notified and whose potential is yet to be established. 

The decision was taken by the Cabinet Committee on Economic Affairs, chaired by the Prime Minister Narendra Modi and is applicable to High Pressure High Temperature, Deepwater and Ultra Deepwater areas.

The policy is expected to provide encouragement and reduce government interference in the natural gas sector. Petrol and diesel prices were also set free from day-to-day government control in recent years, though the central government continues to manage pricing of these items by reducing and increasing taxes, which account for around half of the pump price paid by the consumer.

According to the new gas pricing policy, in case of existing discoveries which are yet to commence commercial production as on 1.1.2016, if there is pending arbitration or litigation filed by the contractors directly pertaining to gas pricing covering such fields, this policy guideline shall be made applicable only on the conclusion or withdrawal of such litigation or arbitration.

All gas fields currently under production will continue to be governed by the pricing regime which is currently applicable to them, the government said.

The landed price-based ceiling will be calculated once in six months and applied prospectively for the next six months. The price data used for calculation of ceiling price in US $ per mmbtu (GCV) shall be the trailing four quarters data with one quarter lag. Director General of Petroleum Planning and Analysis Cell (DG, PPAC) under the Ministry of Petroleum and Natural Gas will notify the periodic revision of gas price ceiling under these guidelines. 

The new policy is expected to result into monetization of the 28 discoveries mentioned above which can result into substantial investment by the contractors, it added. 

“There would be substantial employment generated during the development phase of these discoveries and a part of it would continue during the production.”

ONGC has estimated that in the development of discoveries in the block KG-DWN-98/2, there would be deployment of 3850 direct skilled labours, the ministry of petroleum said.

“Besides, these there would be around 20,000 persons required during the construction phase. GSPC presently in the block KG-OSN-2001/3 is deploying around 690 personnel in the block.”

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