GAIL India will buy the entire produce for the next 15 years from Essar Oil’s coal bed methane (CBM) block of Raniganj East in West Bengal. The state-run gas firm outbid three rivals to win the rights to buy up to 2.3 million metric standard cubic metres per day (mmscmd) of CBM from Essar at a crude linked price which works out to $6.492 per million metric British thermal unit (mmBtu) on gross calorific value basis at an oil price of $60 per barrel, according to the auction details available on Essar’s website.
GAIL confirmed it had won the auction. The prices are to be revised every month and are linked to trailing three-month average price of crude oil. The price discovered in Essar’s auction is similar to what Reliance Industries received in its CBM auction last year. At $60 a barrel of crude, other bids translated into a price of $6.382 per unit from Matrix Fertilizers and Chemicals, $8.582 from Graphite India and $5.215 from Positron Energy.
Despite a higher bid of $8.582 per unit, Graphite India lost out to GAIL as Essar decided a winner based on ‘total revenue maximisation’ formula, people aware of the matter said. Graphite India had bid for a minimum of.025 mmscmd and maximum of .05 mmscmd of gas, which could have resulted in a revenue of $5.53 million for Essar. But GAIL had sought a minimum of .050 mmscmd and a maximum of 2.3 mmscmd, the entire peak volume on offer, which could translate into a revenue of $192.59 million. Supply of gas to GAIL will begin soon, the people said.
Essar’s Raniganj block currently produces 1 mmscmd of gas and is expected to raise output to 2.3 mmscmd by 2020-21. Last year, the government had given CBM producers the freedom to sell gas at arm’s length price in the domestic market through a transparent and competitive bidding process. This prompted Reliance Industries, another CBM producer, to hold auctions last year.
Natural gas produced from conventional fields in India is governed by a pricing formula set by the government. The price is revised every six months and is $2.89 per mmBtu at present. Essar has spent .Rs.40 billion in developing the Raniganj East CBM block so far. The company has nearly 350 completed CBM wells and put in place large gas and water handling infrastructure in its block.