Cit­ing Vi­a­bil­ity, ONGC Seeks Pre­mium Pric­ing for its Gas From KG Block

Resource Digest - - CONTENTS -

Oil and Nat­u­ral Gas Cor­po­ra­tion (ONGC) has sought pre­mium gas pric­ing for an un­de­vel­oped deep-sea block in the KG basin, where it plans to in­vest $6 bil­lion, as top ex­ec­u­tives are anx­ious about the vi­a­bil­ity of the project at the cur­rent oil and gas prices.

The state-run ex­plorer has writ­ten to the gov­ern­ment that the out­put from the KGDWN-982 field off the east­ern coast be given a pre­mium over the do­mes­tic price that was too low to make the project work­able, sources fa­mil­iar with the mat­ter said.

Sev­eral global oil com­pa­nies have sharply cut cap­i­tal ex­pen­di­ture this year as crude oil prices have halved, while LNG prices in Asia have tum­bled to $6.8 per unit from a peak of $17 in April last year. The drop in drilling has re­duced costs of field de­vel­op­ment but not enough to make many projects vi­able.

ONGC has been re­draw­ing its cost es­ti­mates and hop­ing to get gov­ern­ment help with­out which its KG project wouldn't be vi­able at the cur­rent prices.

ONGC, be­ing a state-run firm, is caught in an un­en­vi­able sit­u­a­tion with the gov­ern­ment press­ing it to raise pro­duc­tion and fall­ing prices act­ing as a dis­in­cen­tive. “The gov­ern­ment may be the big­gest share­holder of the com­pany, but the board's re­spon­si­bil­ity is also to guard mi­nor­ity share­hold­ers' in­ter­est. The board rep­re­sents all the share­hold­ers,“said a top com­pany ex­ec­u­tive on the dilemma the com­pany is fac­ing and why the board may hes­i­tate in giv­ing a green sig­nal to the project that may not re­ward share­hold­ers.

An­other ap­pre­hen­sion top ex­ec­u­tives have is a pos­si­ble crit­i­cism if things went wrong. “Fin­gers can be raised in the fu­ture on how the board al­lowed the com­pany to in­vest bil­lions of dol­lars in a project which was so ap­par­ently un­vi­able.”

The KG-DWN-982 field is lo­cated close to the Reliance In­dus­tries' KG-D6 block. It has re­serves of both oil and gas, and is ex­pected to start pro­duc­ing oil by early 2019 and gas six months later. The much de­layed project is im­por­tant for the coun­try seek­ing to cut its crude oil im­port by 10% in seven years from nearly 80% now.

Last Oc­to­ber, the gov­ern­ment had an­nounced a price for­mula for most gas pro­duced in the coun­try and promised to of­fer a pre­mium to out­put from the dif­fi­cult deep-wa­ter projects. The pre­mium, not yet an­nounced, is to be avail­able only to dis­cov­er­ies made af­ter last Oc­to­ber, thereby ex­clud­ing projects like ONGC's KG-DWN-982 and RelianceBP's KG-D6.

In a let­ter to the gov­ern­ment, ONGC has sought a pre­mium for dis­cov­er­ies made be­fore Oc­to­ber last year but not de­vel­oped so far. This would ex­clude Reliance's pro­duc­ing fields but would give the com­pany a higher price for new dis­cov­er­ies that have not been de­vel­oped so far. Pri­vate play­ers have been de­mand­ing the pre­mium for all dis­cov­er­ies in the deep-wa­ter ir­re­spec­tive of the time of dis­cov­ery. The do­mes­tic gas price for­mula is linked to in­ter­na­tional prices and halv­ing of global crude oil and gas prices in a year has slashed lo­cal gas prices by a quar­ter since Novem­ber to $3.82 a unit. The global spot rates for nat­u­ral gas are about $7.

At this price, ONGC has in­creas­ingly be­gun to be­lieve that the in­vest­ment in the project may not be re­ward­ing.

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