Gas producers continue to bleed as govt-dictated prices remain low, says Icra
Natural gas production remains a loss-making proposition for most fields for the Indian upstream producers as government-dictated gas price remains at its lowest level, rating agency Icra has said. The domestic gas price notified at USD 1.79 per million British thermal unit for the six months beginning April 1 remains the lowest since the institution of the modified Rangarajan formula. Additionally, the ceiling on price for gas produced from deep water, ultra deepwater, high temperature and high-pressure fields has also been announced at USD 3.62 per mmBtu for April-September 2021-22 which is 10.8 per cent lower than the price ceiling of USD 4.06 for October-March 2020-21 which would dampen the development of such projects. “While this is unfavourable for domestic producers, it will benefit gas consumers. The consumers will also benefit in the long run from the expectations of continued supply overhang,” Icra said commenting on the gas price notified by the government earlier this week. As per an Icra note, at such low gas prices, gas production remains a loss-making proposition for most fields for the Indian upstream producers notwithstanding some decline in oil field services/equipment costs. However, the depreciation of Indian Rupee against US dollar, would aid the realisations of the gas producers but only to an extent. Sabyasachi Majumdar, Senior Vice-President & Group Head, Corporate Sector Ratings, Icra, said, “Going forward, the supply glut is expected to keep prices of domestic gas low in the near to medium term leading to poor returns even as domestic gas producers such as ONGC and Reliance Industries Ltd (RIL)-BP ramp up gas production significantly.” The absence of a floor and sustained low prices as has been seen in the past few years post implementation of the modified Rangarajan formula make exploration and production unviable even for benign geologies, Icra noted. “Accordingly, low natural gas prices remain negative for the upstream sector adversely impacting revenues, profitability and cash accruals and the incumbents have petitioned the Government of India to provide a floor price for gas prices.” Spot LNG prices had breached USD 30 per mmBtu in February 2021 due to increase in oil prices, unplanned outages at export facilities in several countries, multiple cold waves, high shipping rates and delays in the Panama canal. Though spot prices have come down to USD 6-6.5 per mmBtu levels, low inventory levels as winter ends are set to support prices, as well as demand, as North Asia and Europe look to refill gas storage. Nevertheless, the supply overhang remains with about 37.6 million tonnes per annum liquefaction capacity added in 2019 and 27.8 MTPA in 2020, besides which capacity additions till 2025 would be in excess of incremental demand which will weigh on gas prices, Icra said. From the consumers’ perspective, the low domestic gas price is a positive. “The continuation of the low domestic gas prices would lead to a competitive cost of generation for the domestic gas-based power generation projects,” it said. Given the cost-plus nature of the power purchase agreements tied up by the gas-based power projects, the benefit is expected to be passed on to the customers, mainly the state distribution utilities (discoms). However, the extent of the benefit would be limited for the discoms, given the subdued utilisation of the gas-based power plants in the country with annual average plant load factor (PLF) of 22-25 per cent for the gas-based capacity at all-India level, amid the inadequate supply of domestic natural gas. During first 11 months of 2020-21, the gas supply from domestic sources remained low at 22 per cent of the allocated quantity for gas-based power generation units as per the data from Central Electricity Authority. Moreover, with the uptick in spot LNG prices, the spot LNG consumption by gas-based power projects has reduced from the 11.85 million standard cubic meters per day in October 2020 to 2.62 mmscmd in February 2021. For every USD 1 per mmBtu variation in gas price, the cost of generation would vary by 60-65 paise per unit for gas-based power generation projects at prevailing rupee dollar exchange rate. For the fertiliser sector, nearly 36 per cent of the gas requirement of the fertiliser sector is met through domestic gas while the remaining is met through R-LNG imports. Moreover, the industry is supplied gas at pooled pricing, which takes into account the weighted average of the domestic and R-LNG prices. With no change in the domestic gas price, the pooled gas price will not witness any upward bias although term LNG prices have risen over the last couple of months with the strengthening of the crude oil prices, Icra said. However, the overall pool price is expected to remain in the range of USD 9.5-10 per mmBtu for 2021-22 if the crude oil prices sustain at current levels. As per Icra estimates, for every USD 1 rise in the pooled price, the subsidy requirement for the urea sector rises by around Rs 4,500-5,000 crore. With pooled prices at these levels, the subsidy budget for the urea sector will be adequate to meet the subsidy requirement for urea in 2021-22, it said. As regards the impact on the city gas distribution (CGD) sector, Prashant Vasisht, Vice President and Co-Group Head, Corporate Ratings, said “Sales volumes for CGD players have reached pre-Covid levels in Q4FY2021 supported by strong growth in CNG volumes. This has been supported by resumption in economic activity as well as the rising prices of auto-fuels which have resulted in higher preference of CNG vehicles.” Commencement of new CNG stations in recently awarded cities is also contributing to growth. “Amidst all this, the continuation of low gas prices is a positive. CGD players are likely to keep prices unchanged for their CNG and domestic piped natural gas consumers,” he said.
Reliance-BP seek buyers for 5.5 mmscmd gas from KG-D6
Reliance Industries Ltd and its partner BP Plc of UK have sought bids for sale of 5.5 million standard cubic meters per day of additional natural gas that will be available for sale from their eastern offshore KG-D6 block. The e-auction is slated for April 23 and the gas supply will start from late April or early May, according to the tender document. Bidders will have to quote a price linked to Platts JKM (Japan Korea marker), the liquefied natural gas (LNG) benchmark price assessment for spot physical cargoes. The lowest bid that can be placed is JKM minus USD 0.3 per million British thermal unit. The highest acceptable bid would be JKM plus USD 2.01 per mmBtu. This is the same benchmark the RIL-BP had used in February to sell out 7.5 mmscmd of gas from the block. At current price, the lowest price for the 5.5 mmscmd of gas that RIL-BP are auctioning comes to near USD 6.5 per mmBtu. But they will be entitled to a maximum of USD 3.62 per mmBtu ceiling fixed by the government for a six-month period to September 30. The consortium of RIL and BP Exploration (Alpha) Limited (a unit of BP Plc) “is developing deepwater gas fields viz. the R Cluster (D34), MJ (D55) and Satellites & Other Satellites (D2, D22, D29 and D30) in the KG D6 block,” the tender document said. The gas to be produced from the fields has been granted marketing and pricing freedom but this is subject to a ceiling price that the government fixes every six month. The ceiling price for April 1 to September 30, 2021 is USD 3.62 per mmBtu. Bidders can seek a supply tenure of 3 to 5 years. The minimum volume one could ask for is 0.01 mmscmd and the maximum could be the full volume on offer. “A Bidder shall be required to quote the variable denoted as ‘V’ in USD per mmBtu terms pursuant to the Gas Price formula specified below: Gas Price (in US$/MMBtu (GCV)) shall be = JKM + V,” it said. In the February auction, RIL picked up two-thirds of the 7.5 mmscmd gas sold. Reliance O2C, an affiliate of RIL, picked up 4.8 mmscmd of gas while state gas utility GAIL (India) Ltd won 0.85 mmscmd of supplies and Shell 0.7 mmscmd. Adani Total Gas got 0.1 mmscmd, Hindustan Petroleum Corporation Ltd (HPCL) 0.2 mmscmd and Torrest Gas 0.02 mmscmd. Other buyers include IRM Energy (0.1 mmscmd), PIL (0.35 mmscmd) and IGS (0.35 mmscmd). Sources said the gas was bought at a price of USD 0.18 per mmBtu discount to JKM i.e. price of JKM (minus) USD 0.18 with tenures ranging from 3 to 5 years. Reliance O2C is the new unit that holds the firm’s refinery and petrochemical assets. The April auction would be the third time RIL-BP conducted an e-bidding process which ran on a dynamic forward auction basis for sale of KG-D6 gas. In November 2019, 5 mmscmd of natural gas was sold at price in the range of around 8.6 per cent of Brent crude oil for tenure ranging from 2 to 6 years. RIL-BP started production of gas on December 18 last year from the R Cluster ultra-deep-water gas field in block KG D6 off the east coast of India. Essar Steel, Adani Group and GAIL had bought the majority of gas sold in that auction by bidding between 8.5 and 8.6 per cent of dated Brent price. RIL-BP is investing USD 5 billion in bringing to production three deepwater gas projects in block KG-D6 R-Cluster, Satellites Cluster, and MJ which together are expected to meet about 15 per cent of India’s gas demand by 2023. R-Cluster will have a peak output of 12.9 mmscmd while satellites, which are supposed to begin output from the third quarter of the 2021 calendar year, would produce a maximum of 7 mmscmd. MJ field will start production in the third quarter of 2022 and will have a peak output of 12 mmscmd. Reliance has so far made 19 gas discoveries in the KG-D6 block. Of these, D-1 and D-3 — the largest among the lot — were brought into production from April 2009 and MA, the only oilfield in the block was put to production in September 2008. While the MA field stopped producing last year, output from D-1 and D-3 ceased in February. Other discoveries have either been surrendered or taken away by the government for not meeting timelines for beginning production. Reliance is the operator of the block with 66.6 per cent interest while BP holds the remaining stake.