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