Where Does the KG D6 Gas Price of $4.2 per MMBTU Stand in the market?

Controversies have surrounded KG D-6 gas, but RIL downplayed all:

Reliance Industries operated KG-DWN-98/3 gas field, also known as KG D6 has run into controversies immediately after the major gas find in 2002. Whether it is the quantum of the discovery, capital expenditure for the development, legal tussle with NTPC over the contractual obligation or the Memorandum of Understanding (MOU) signed with Reliance Natural Resources (RNRL) for supplying 28 mmscmd gas, Reliance has witnessed numerous allegations.

RIL, however, has proven these accusations erroneous time and again. RIL had estimated the reserves of KG D6 block to the tune of 14 trillion cubic feet (tcf), which was downplayed by many to the maximum of 5-6 tcf. Today, with limited number of wells drilled, the commercially recoverable reserves are approved at 11.3 tcf by the Government. The in-place reserves are estimated to the extent of 40 tcf by various analysts. Similarly, the capital expenditure of $8.8 billion was said to be escalated. The Government, however, itself came forward in defense of the accusation arguing that the reserve estimates along with peak production level has doubled since the initial development plan resulting in increased capital cost due to three-fold rise in commodity prices, equipment prices, rig charges and engineering cost.

As far as NTPC issue is concern, RIL has made it clear that disagreement with NTPC is not on the price of $2.34 per mmbtu but on unlimited liability clause which coerces the RIL to pay for entire cost of substitute fuel in case of gas supply failure even in case of force-majeure by the company. RIL only wants the penalty charges to be capped that too as low as half of what is applicable for NTPC in case of its inability to off-take the gas, which may force the RIL to flare a sizable amount of precious gas.

Even in case of RNRL, RIL agrees to supply the said quantity of gas at agreed price provided the Government consents on price and marketing freedom. In fact, RIL tried to get the Government certification for price of gas to be supplied to RNRL, however, the latter rejected the same, stating that the price did not match the arms-length criteria of pricing as per the Production Sharing Contract (PSC).

KG D-6 gas price alleged to be unrealistic and too high to get buyers:

RNRL, annoyed with the Government decision, moved to court and made several allegations against RIL. The company also published all its allegations in the form of advertisement in almost all national news dailies for several days. Among others, one of the main accusation was that RIL was to making super normal profit by selling gas at $4.2 per mmbtu and that the price does not stand relevant at the time when gas prices has crashed by as much as 80% in international market. The Anil Ambani led company also claimed that RIL is unable to find customers at this price as the price is too high for the Indian market.

Is $4.2 per mmbtu a realistic price? Where does it stand in the market?

In view of this, it becomes pertinent to investigate where the gas price of $4.2 per mmbtu stands in Indian and global market. Though, Anil Ambani group refers to sharp fall in international gas price, which is factually incorrect, as KG D6 gas price is for long-term and does not get impacted significantly due to market forces.

Price of $4.2 per mmbtu cheaper than nearly all the domestic gas prices except for APM gas:

For a fair assessment, the price of $4.2 per mmbtu needs to be compared with prices of domestic gas from various fields. In the country, price of gas is lowest at $1.8 per mmbtu for APM fields operated by state-run ONGC and OIL. The Government is providing subsidized gas to fertilizer, power and City Gas Distribution sectors. Lately, ONGC and OIL has demanded the APM gas prices to be raised to $4.2 per mmbtu.

However, media report indicates that Government has agreed to a price hike of 44% or $2.6 per mmbtu. The second lowest gas price of $3.5 per mmbtu is for Ravva field operated by Cairn, which is up for revision from December, 2008. Bearing in mind the demand of gas in the country and market trend, revised gas price for Ravva field would not less than $5 per mmbtu, higher than KG D6 price.

For image1 please refer to Blog:

http://oilandgasindia.blogspot.com/2009/12/where-does-gas-price-of-42-per-mmbtu.html

Gas price for another Cairn operated field Ravva Satellite is already higher than KG D-6 gas at $4.5 per mmbtu and is set for review along with Ravva. If media reports are to be believed, GAIL, the marketer of Ravva Satellite gas, had offered the price of $5.73 per mmbtu as soon as the price became due for revision, only to be rejected by the operator. Latest media reports suggest that Cairn has demanded the price of $6.75 per mmbtu from GAIL based on the price offered from an industrial unit. The demanded price is over 60% higher compared to KG D-6 price.

Gas derived from Lakshmi field is priced at $4.75 per mmbtu whereas for Bheema and several fields operated by GSPC is set at $5 per mmbtu, well over $5 per mmbtu. Price for gas from Panna-Mukta and Tapti fields is highest in the country at present and is sold at $5.70 per mmbtu for quite some long now. This price is 35% more than the price for KG D-6 gas.

As far price of PLL’s long-term LNG, priced at $6.84 per mmbtu after the recent revision, is concerned, it is nealy 63% costlier than KG D6 gas price of $4.2 per mmbtu. From the evaluation of all the gas prices, present and near future, from various sources, in the domestic market, it is unambiguous that the gas price of $4.2 per mmbtu for KG D6 gas is cheapest gas available in the country, keeping aside the gas from APM fields. However, comparison with gas prices in the world market may provide a better idea of the relevance of $4.2 per mmbtu gas price.

Henry Hub gas price ranged between $5-8 per mmbtu during last five years, which is considerably above the $4.2 per mmbtu price:

Globally, gas prices at Henry Hub in Louisiana are considered as the benchmark. Price trend for past five years (from 2004 to 2009) at Henry Hub indicates that gas prices have broadly ranged between $5 per mmbtu to $8 per mmbtu during 2004-09. Gas prices shot up sharply above $13 per mmbtu in 2005 but eventually settled in the range of $5-8 per mmbtu. Gas prices at Henry Hub again surged to nearly $15 per mmbtu in 2008 on account of spiraling oil prices and huge gas demand, but crashed below $5 per mmbtu in 2009 due

For image2 please refer the blog

http://oilandgasindia.blogspot.com/2009/12/where-does-gas-price-of-42-per-mmbtu.html

to unprecedented recession in US market that resulted in gas prices declining well below $5 per mmbtu. As the US was in recession and anticipated to come out of the same, the energy demand ultimately will also find the lost northward trend. The will in due course bring the gas prices back to the range $5-8 per mmbtu. Compared to the Henry Hub price range of $5-8 per mmbtu, KG D-6 price of $4.2 per mmbtu for five years seems very competitive and indeed substantially lower. Hence, the $4.2 per mmbtu gas price stands relevant even by global standards.

Coming back to the domestic market, various fuels like Petrol, Diesel, LPG, Kerosene, Naphtha, Fuel Oil and Coal are being used for different purposes in households, automotives and industries.

All alternative fuel prices multiple times higher than that of $4.2 per mmbtu barring domestic coal:

Prices of four major petroleum products namely Petrol, Diesel, Kerosene and Domestic LPG is regulated by the Government and changed in larger public interest. Retail price of Rs. 48.76 per litre of Petrol in Mumbai (Rs. 4.69 per litre cheaper than the actual price) corresponds to $23.27 per mmbtu considering the calorific value of Petrol at 11,000 kcal per litre.

Addition of Rs. 4.69 per litre subsidy provided by the Government increases it to $25.51 per litre. Similarly, diesel price of Rs. 36.7 per litre (Rs. 3.09 cheaper than the actual price) with calorific value of 9800 kcal per litre translates to $19.66 per mmbtu. If the subsidy of Rs. 3.09 per litre is added into this, the price in energy terms increases to $21.32 per mmbtu.

For image3 please refer the blog

http://oilandgasindia.blogspot.com/2009/12/where-does-gas-price-of-42-per-mmbtu.html

Likewise, the highly subsidy Kerosene sold under Public Distribution System costs Rs. 9.01 per litre whereas the same for commercial purposes is priced at Rs. 25,280 per KL or Rs. 25.28 per litre in Mumbai. With energy content of 9500 kcal per litre, the price works out to $4.98 and $13.97 per mmbtu respectively. Similarly, the price of 14.2 kg Domestic LPG cylinder of Rs. 312.76 per kg, with calorific value of 11,200 kcal/kg, corresponds to $9.88 per mmbtu, which with the addition of Rs 158.55 subsidy becomes $14.89 per mmbtu. Price of 19.2 kg commercial LPG cylinder of Rs. 695.7 or Rs. 36.23 per kg, works out to $16.26 per mmbtu.

Market prices of Fuel Oil and Naphtha at Rs. 24,910 per tonne or Rs. 24.91 per kg and Rs. 35,920 or Rs. 35.92 per kg, with calorific value of 10,440 and 11,200 per kg respectively, works out to price of $12.53 and 16.84 per mmbtu respectively.

Prices of all these petroleum products, with or without Government subsidies, are beyond the KG D-6 gas price of $4.2 per mmbtu. Nearest among all, is the subsidized price of Kerosene at $4.98 per mmbtu which is well over $4.2 per mmbtu price. Exclusion of subsidy from the Kerosene price makes it over three times than that of KG D-6 gas price. Similarly, swelling subsidy on domestic LPG also couldn’t bring the prices more than double compared to KG D-6 gas price. Commercial price of LPG, in fact, is several times more than Kg D-6 gas price of $4.2 per mmbtu. However, price of domestic as well as imported coal, with calorific value of 3500 and 5800 kcal per kg respectively, at Rs. 1,200 per tonne or Rs. 1.2 per kg and Rs. 4080 or Rs. 4.08 per kg, translates to $1.8 and 3.69 per mmbtu respectively, which are significantly lower than $4.2 price of gas. Nonetheless, the adverse environmental effects of coal makes KG D-6 gas a better choice.

KG D6 Gas – Most Realistic and Competitive fuel price in the market:

Finally, the gas price of $4.2 per mmbtu appear not only highly competitive and comparable to domestic gas prices and RLNG, but also lower than average price of gas in international market. The price is also considerably lower than other substitute fuels in the domestic market. Undoubtedly, the Empowered Group of Ministers seems to have worked thoroughly to make the KG D-6 price realistic and acceptable. Therefore, the seeds of doubts being raised by Anil Ambani company about the KG D-6 gas price appear irrelevant and have grown from personal animosity.

For further information, please refer to blog

http://oilandgasindia.blogspot.com/2009/12/where-does-gas-price-of-42-per-mmbtu.html