Iran wants India to pay more than triple the gas price for award of the coveted Farzad-B natural gas block to ONGC Videsh Limited (OVL), the overseas arm of state-owned Oil and Natural Gas Corp (ONGC). Iran wants India to buy all of the natural gas to be produced from the Persian Gulf block at a price equivalent to the rate Qatar charges for selling liquefied natural gas (LNG) to India under a long-term deal. Qatar, as per a revised formula agreed upon in December 2015, sells 7.5 million tonnes a year of LNG to Petronet LNG Ltd - India's biggest gas importer - at a price of $7-plus per million British thermal unit.
The rate being sought by Iran is triple of $2.3 per mmBtu rate OVL is willing to pay for the gas during low global oil prices. If global rates rise, OVL is willing to pay $4.3 per mmBtu, sources privy to the development said. When oil prices move up, rates of LNG from Qatar would also rise. Sources said that since the lifting of western sanctions, Iran is playing hardball over award of the field which was discovered by OVL.
OVL has recently submitted a $5.5 billion master development plan for bringing the gas in Farzad-B to production. Iran allows all the cost sunk in by an operator to be recovered from sale of oil or gas. For this reason, it wants OVL to reduce the cost of development as well as pay a higher gas price. The two nations were initially targeting concluding a deal on Farzad-B field development by November 2016 but later mutually agreed to push the timeline to February 2017. Now, the deal is being targeted to be wrapped up by September after the two sides agree on a price and a rate of return for OVL's investments.
Farzad B was discovered by OVL in the Farsi block about 10 years ago. The project has so far cost the OVL-led consortium, which also includes Oil India Ltd and Indian Oil Corp (IOC), over $80 million. Iran was initially unhappy with the $10 billion plan submitted by OVL for development of the 12.5 trillion cubic feet reserves in Farzad-B field and an accompanying plant to liquefy the gas for transportation in ships.
It felt the $5 billion cost OVL and its partners have put for developing the field was on the higher side and wanted it to be reduced. ONGC Videsh will earn a fixed rate of return and get to recover all the investment it has made in the field development. Sources said that in the new master development plan (MDP), the company has estimated cost of putting up a facility to convert gas into LNG and shipping it to India at $5-6 billion.
The field in the Farsi block has an in-place gas reserve of 21.7 tcf, of which 12.5 tcf are recoverable. New Delhi is keen that the gas from the field comes to India to feed the vast energy needs. But it initially felt deterred from investing because of the fear of sanctions imposed by the US. But with the lifting of sanctions last year, it is back to discussing a master development plan.