RIL, Essar seek to sell CBM gas at market rates

RIL, Essar seek to sell CBM gas at market rates
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Story Dated : October 10, 2015

New Delhi: Private explorers Reliance Industries, Essar Oil and Great Eastern Energy Corporation (GEECL), who have committed to invest around $2 billion in coal bed methane (CBM) blocks over the next three to five years, have sought freedom to sell gas from these blocks at market rates.

The firms want the pricing mechanism adopted by the Narendra Modi government for the auctioning of 69 small and marginal fields to be extended for CBM blocks.

On September 23, industry body FICCI, on behalf of these industry players, wrote to KD Tripathi, secretary, ministry of petroleum and natural gas, suggesting that the price discovery mechanism, proposed under the marginal fields policy, should be made applicable to CBM contracts as well, since they are based on the revenue sharing contract model like the marginal fields.

The private players say that gas pricing becomes a key factor in incentivising the contractors to make continuous investments required to start commercial production and maintain these throughout the life of the project.

Though CBM contracts offer sale of gas at arms-length price, the UPA-government had taken away the marketing freedom by bringing CBM gas under the purview of the Gas Utilisation Policy, where the government decides the price and allocation of gas.

The implementation of the policy adopted in September for marginal fields for CBM development will also send a very strong signal to the potential bidders in the proposed CBM-V round under which six would come under the hammer, A Didar Singh, secretary-general of FICCI, wrote to Tripathi.

Successful bidders for the 65 marginal fields are given the freedom to sell crude oil or natural gas at ‘market-determined prices’ sans any government interference.

Moreover, the bidders would be given the right to sell gas to customers of their choice, unencumbered by the government’s allocation policy.

The proposed $2-billion investments in the CBM projects by the private players are expected to lead to an increase in output to about 6 million metric standard cubic meter per day (mmscmd) from 1.1 mmscmd now.

However, these investments, the companies say, are subject to a remunerative pricing regime in addition to timely regulatory approvals including land acquisition, forest and environment clearances, among others.

Since October 1, the price of natural gas from domestic fields has dropped by 18.14% to $4.24/mBtu from October 1 on net calorific value (NCV). Till September 30, the price was $5.18/mBtu. The revised price on gross calorific value (GCV) would be $3.82/mBtu.

The explorers are of the view that the absence of gas infrastructure and gas markets make the CBM projects more challenging.

The blocks are situated in West Bengal, Jharkhand and Madhya Pradesh. Other factors such as delay in forest and environment clearances, local issues such as theft and vandalism are resulting in cost overruns making the viability of the blocks more challenging.

Till now, nearly $1.18 billion investments have been made to CBM projects in India. Currently, GEECL’s Raniganj (South), while Raniganj (East) held by Essar Oil are the only two blocks under production. India offered 33 CBM blocks.

However, 17 of them, or 50% of the blocks, have been relinquished. RIL targets to commence production from Sohagpur (West) in Madhya Pradesh, while ONGC from its Bokaro block.