Reliance Industries and its partner UK’s BP Plc on Wednesday invited companies to bid for incremental gas it plans to produce from the second-wave discoveries in the KG-D6 block, pricing them for the very first time against an international gas benchmark. While Reliance-BP had in November 2019 sold the first 5 million standard cubic meters per day of gas from the R-Series field in the KG-D6 block, the duo has now invited bids for 7.5 mmscmd of incremental output that is likely to be available from February next year, according to a notice inviting offer.
They have priced the first 5 mmscmd of gas against Brent crude oil but now they are seeking rates equivalent to JKM or Japan/Korea Liquefied Natural Gas Import Price. Bidders have been asked to ”quote the variable denoted as ’V’ in USD per million British thermal unit (MMBtu) terms.” ”The gas price (in USD/MMBtu (GCV)) shall be = JKM + V,” the notice said.
GCV stands for gross calorific value. ’V’ can be a positive, zero or negative number and up to two decimal places but it cannot be less than (-)0.30 USD/MMBtu, it said.
This means users will have to quote -0.30 or higher value of ’V’. JKM averaged USD 6.20 per MMBtu in November and at the base or cut off price, KG-D6 gas would cost USD 5.9 per mmBtu.
This is higher than USD 4.2 to 4.4 per MMBtu rate at which the first 5 mmscmd are sold at Brent crude oil benchmark. Brent crude oil is presently in the range of USD 50 to 51 per barrel. Pricing of gas at JKM will be the first time that domestically produced gas is being sold at rates linked to an international gas benchmark, industry sources said.
Also, this will be the first discovery of gas price since the October 2020 decision of the government setting out uniform e-bidding norms for finding the market price. That Cabinet decision also allowed the sale of gas to ’affiliates’ and so while Reliance-BP affiliate companies couldn’t participate in the November 2019 price discovery, they can do so in the current one when e-bidding happens on January 22.
The government has given operators the freedom to discover market prices but this rate is subject to a pricing ceiling or cap that the government notifies every six months. The cap for six months to March 31, 2021, is USD 4.06 per mmBtu. And accordingly, Reliance-BP would get only that amount for the first 5 mmscmd of gas that they started to produce earlier this month.
Essar Steel, Adani Group and state-owned GAIL in November 2019 bought the majority of the initial 5 mmscmd of gas planned to be produced from R-Series in the KG-D6 block by bidding between 8.5 and 8.6 per cent of dated Brent price. In that bidding, Reliance-BP had asked gas users to quote a price (expressed as a percentage of the dated Brent crude oil rate), supply period and the volume of gas required.
A floor or minimum quote of 8.4 percent of dated Brent price was set, which meant that bidders had to quote 8.4 percent or a higher percentage for securing gas supplies. Dated Brent means the average of published Brent prices for three calendar months immediately preceding the relevant contract month in which gas supplies are made.
The rate discovered in the November 2019 auction at the lower end of the Brent price band is the same as the one that Reliance got in the first five years of production from Dhirubhai-1 and 3 and MA fields in the KG-D6 block. These fields ceased to produce a few months back. Reliance got USD 4.205 per mmBtu for gas from D1 and D3 and MA fields during April 2019 and March 2014. It would have got double of that rate if a new formula proposed by the Rangarajan committee was approved but the new BJP government scrapped it and brought a new formula on pricing gas at rates prevalent in export surplus nations such as the US and Russia.
The rates came to USD 5.05 in 2014 and are currently at USD 1.79 per mmBtu. Sources said the government in 2016 allowed a higher price for any new gas to be produced from a difficult project such as the deep sea field. R-Cluster (or R-Series) fields fell in that definition and gas from it was free to be sold but subject to the price cap.
The price cap for October 2020 to March 2021 period is USD 4.06 per mmBtu, down from USD 5.61 in the previous six months. Reliance-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 percent interest while BP holds the remaining stake.
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First Published: IST