Oil and Natural Gas Corporation Limited has sought higher gas prices from the government for a block it plans to develop in the KG Basin, warning that it will otherwise have to mothball the $600 million-project, company executives said.
ONGC has recently written to the government asking for a special pricing dispensation for the block, KG-OSN-2004/1, which doesn’t qualify as a ‘difficult field’ under the government policy unveiled last year. India offers higher gas prices to fields located in difficult terrains such as deep water or highpressure, high-temperature areas.
Price available to gas from difficult fields is $6.30 per million metric British thermal unit (mmBtu), as against $2.89 for ordinary domestic fields.
In the absence of higher gas prices, ONGC will not be able to develop the KG project as well as a few other projects, including one in the Kutch region, a company executive said, adding that these projects together can produce about 10 million metric standard cubic meter per day (mmscmd) of natural gas. ONGC’s KG block has four fields in deep and ultra-shallow waters.
Its field is 300 meters deep, less than the 400 meters depth that qualifies as deep water under the government policy.
“This block also has ultra-shallow field, which is just about 8 meters deep. Developing this is as costly as a deep-water field since ultra-shallow rigs are scarce and therefore expensive,” a company executive said. “The break-even for the KG project can be achieved at a gas price of $4.40/unit but the price available is just $2.89,” the executive said. The ONGC board had approved the project in March, but without the prospect of higher gas prices, it won’t progress further, he said.
The expected peak production of 5.35 mmscmd of natural gas by 2020 from the KG project will likely get delayed if the company doesn’t begin investing immediately, the executive said. Without higher gas prices, another 4 mmscmd of gas production planned by ONGC will also get delayed, he added.
Cost High for Other Blocks Too
The company is hoping to ready in three months the field development plan for Kutch-GK-28/42 block, which is expected to produce 3 mmscmd at its peak. “Here the break-even gas price is even higher at $7 per unit. Even after optimisation, it wouldn’t fall below $5/unit,” the executive said. Gas from this field contains nitrogen, and building a facility to remove nitrogen from the gas would mean additional investment, he said.
ONGC also has a couple of smaller fields with a total expected peak production of 1.1 mmscmd, which can’t viably produce at the current domestic gas prices. The field development plan for these are not yet ready. India’s domestic gas prices are calculated by a formula that tracks international rates. Prices are revised every six months.
Accepting ONGC’s demand can trigger similar demand from other gas producers. Therefore, the government may have to bring about a change in the existing pricing policy so that it applies to all companies. Cabinet’s approval is required for effecting any policy change.