Gas exploration: Reliance Industries' plea for even higher price than the one "offered" by Govt of India

By Rajiv Shah
In a significant move, the Reliance Industries Ltd (RIL) has declared that the “higher price” being offered by the Government of India to it for oil and gas exploration off Andhra Pradesh coast is “not market linked”, and it should get an even more, in keeping with market realities. The "revision", which the Government of India has still not formally announced, is from $4.2 per MMBtu (million British thermal units) to $8.4 MMBtu, which was challenged by several politicians, including Aam Aadmi Party (AAP) leader Arvind Kejriwal, who claimed it would mean a “windfall” of Rs 54,500 crore to the RIL.
RIL has quoted a top energy consultant to suggest that the price it should get should be somewhere between $8 and 12, and not just $8.4, in order to ensure that the exploration becomes viable. In a just-released book, “India Has Never Been Here Before”, the RIL has quoted HIS-CERA to say how much should the price be to make an exploration project viable. It says, for onshore exploration and production, the price should be $6-8 per MMBtu, for shallow waters $6-10 per MMBtu, for deepwater $8-12 per MMBtu, and for ultra-deepwater $10-12 per MMBtu.
The RIL’s KG-D-6 operation off Andhra Pradesh coast near Kakinada, named after founder of the company, late Dhirubhai Ambani, falls under “deepwater operations” category. Regretting the “campaign against the revised gas prices”, the RIL insists, “The revised domestic gas price estimated at $8.4/MMBtu … is still not market linked price… and taken on an energy parity basis, is far cheaper compared to alternative fuels being sold without government subsidy.”
Insisting that the price being offered was approved after a gap of seven years, and is to be effective April 1, 2014, the RIL has suggested, in these seven years the price fixed at $4.205 per MMBtu had gone unviable quite some time back. “The prices of other commodities, offshore services, consumer items, etc. have increased disproportionately compared to the revised gas price. Crude oil prices have moved from around $30 per barrel to over $100 per barrel and imported LNG from around $4 per MMBtu to over $14 per MMBtu.”

Risk in exploration, as seen by RIL

The RIL warns, “If domestic gas is not offered at market price, it will result in rapid depreciation of the Indian rupee. There are currently over 100 discoveries but only a few are under production as companies do not find it viable to produce at current prices. This inability to produce gas at current prices will increase dependence on expensive imports and adversely impact our balance of payments.” It quotes HIS-CERA to say that the current gas demand-supply gap at 45 per cent can balloon 80 per cent in 2025. Only a “price hike will make more gas available as more discoveries can be produced reducing the need to import gas”, it says.
The RIL won the KG-D-6 block in 2000 under the Government of India’s New Exploration and Licensing Policy (NELP) following an international bidding. It has gone on to justify its claim for a still higher price than what it is being offered by saying the contractor involved in gas exploration has to bear the entire risk. “The costs are steep. Drilling and exploration of a well in deep waters can cost more than Rs 700 crore. Even if a well strikes oil or gas, the quantum of reserves can only be estimated in terms of probability.” Further, “Each development well costs even more at Rs 1,200 to 1,400 crore”.
Giving financial reasoning for the high risk, the RIL says it has already “invested $12.6 billion, and remains the largest investor under NELP.” It adds, “RIL currently retains only 7 blocks (of which six are off-shore) of the 45 blocks awarded under pre-NELP and NELP rounds. It invested $ 1.92 (Rs 12,000 crore) on the 37 surrendered NELP blocks. It is likely to surrender two more blocks. Many blocks with discoveries had to be relinquished as they were unviable to develop at the current price of $4.205 per MMBtu.”
As of now, the RIL says, it has found 2.279 trillion cubic feet (tcf) of gas from the oil fields under it, as against nearly 14.5 tcf it had claimed earlier. Arguing against those who say the RIL is “hoarding” gas (especially Kejriwal), it says, “The decline in production in KG-D6 fields blocks is due to reservoir complexity and geological surprises… The issue can be easily settled by getting the existing reserves assessed and certified through any expert international reserve certification agency…”

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