India Inc calls for revising gas pricing formula

Indian industry has called for the government to revise the formula for setting domestic natural gas prices to adequately remunerate exploration and production activity in the country, the Federation of Indian Chambers of Commerce and Industry (FICCI) said on Friday.
In October 2014, the government announced an upward revision of the price for gas to $5.61 per unit against the industry's demand for at least doubling it to a little over $8 per unit, as per the Rangarajan Committee recommendations.

"FICCI strongly advocates a gas pricing mechanism which adequately remunerates domestic exploration and production) (E&P) activity. Not only is this imperative for the development of domestic hydrocarbon industry, but is vital towards ensuring India's energy security," the industry chamber said in a statement here.

"A pricing regime should be reflective of the enormous geological risks and production uncertainties which are inherent in geography such as India," it said.
In a letter written earlier this week to Petroleum Secretary Kapil Dev Tripathi, FICCI said the gas price formula benchmarked on prices prevailing in "gas surplus/exporting geographies" like Russia Canada and the US, "will only make the Indian market less attractive in a world where other markets are more remunerative."

"Government should revise the formulae based on prices of gas importing/gas deficit countries, that is sustainable in the long run," FICCI Secretary General A. Didar Singh wrote.
"Continuing with the current gas pricing regime will severely affect India's larger goal of reducing oil import dependency and building the domestic hydrocarbon capacity," he said.
Domestic gas prices are calculated by taking the weighted average prices at the Henry Hub of the US, the National Balancing Point of Britain and the rates in Alberta of Canada and Russia with a lag of one quarter.

American ratings services Standard & Poor's said earlier this month that the revised price of domestic natural gas at $3.82 per unit for six months from October 1 will "discourage oil exploration and production companies from committing new capital expenditure".
The ratings agency said India should benchmark its natural gas prices to similar gas-deficient nations instead of using rates prevalent in gas-surplus areas like the US and Canada.
"Given India's gas production deficit and emerging gas transport infrastructure, comparing prices in similar geographies will be more relevant," it said.

Noting gas prices in India are lower than in other regional economies, S&P said this was likely to discourage capital expenditure in exploration.

Another global ratings agency Moody's said on Monday: "The gas price reduction is credit negative for upstream producers ONGC and Oil India Ltd. because it will lower their revenues and cash flows, which are already declining from low oil prices."

"The gas price reduction will have its greatest effect, in absolute terms, on ONGC, the country's largest producer of natural gas," it said, adding that it expected ONGC's revenues to decline by around $300 million and for Oil India Ltd by only around $33 million", an article by Moody's Credit Outlook said.

"The government needs to immediately implement its decision to announce higher premium for deepwater, ultra-deep water as well as high-temperature and high-pressure fields," Didar Singh said.
While approving a new gas pricing formula in October last year, the government had decided that new gas discoveries in deep-water, ultra-deep sea as well as high-temperature and high-pressure areas will be given a premium over and above the approved price.

While shallow-water blocks are at a depth of up to 100-500 metres, deep-water blocks descend to around 1,000 metres. Those at depths beyond 1,500 metres are classified as ultra-deep-water blocks.
These are the areas where the Reliance Industries-led consortium has maximum discoveries on the eastern offshore.

Source: Yahoo News

New gas price will discourage exploration: S&P

The revised price of domestic natural gas at $3.82 per unit for six months from October 1 will "discourage oil exploration and production companies from committing new capital expenditure", American ratings services Standard & Poor's said on Sunday.

"We believe the government's plan to stimulate private sector participation and bring in transparency in gas pricing by introducing formula-driven gas pricing is well intended," S&P said in a statement.

"However falling, hydrocarbon prices over the past one year have brought in uncertainty over the viability of exploration projects," it said.

The ratings agency said India should benchmark its natural gas prices to similar gas-deficient nations instead of using rates prevalent in gas-surplus areas like the US and Canada.

"The formula for pricing domestic gas considers prices in gas-surplus geographies such as the US and Canada, which have developed gas transportation infrastructure," the statement said.

"Given India's gas production deficit and emerging gas transport infrastructure, comparing prices in similar geographies will be more relevant," it added.

Domestic gas prices are calculated by taking the weighted average prices at the Henry Hub of the US, the National Balancing Point of Britain and the rates in Alberta of Canada and Russia with a lag of one quarter.

Noting gas prices in India are lower than in other regional economies, S&P said this was likely to discourage capital expenditure in exploration.

"Globally, several E&P companies have scaled back spending and put new exploration projects on hold amid low hydrocarbon prices," S&P said.

"Investment by private sector oil and gas companies in India has been small and their capex commitments are likely to be uncertain because of the price revision," it added.

This reduction will impact producers like state-run Oil and Natural Gas Corp, which stands to lose Rs.1,059 crore from profits, ONGC director (Finance) A.K. Srinivasan told reporters here.

The new price is a sharp 18 percent cut over the current $4.66 per million British thermal unit (mBtu) on gross calorific value (GCV) basis.

On net calorific value (NCV) basis, the new gas price for October 1 to March 31, 2016 would be $4.24 per mBtu as compared to $5.18 currently.

India Ratings and Research (Ind-Ra) said domestic gas producers state-run Oil India and ONGC could face a revenue decline of Rs.120-130 crore and Rs.1,080-1,150 crore respectively on gas sales during the second half of 2015-16 fiscal.

ICRA said the cut "reduces the profitability of the gas produced from the existing fields and adversely impacts the viability of new exploration and development projects".

Source: Business Standard

BP Pledges More Accountability For Its Role in Climate Change

BP plc plans to acknowledge more about its role in how its operations may impact the climate after shareholders -- with full board support -- overwhelming passed a resolution at the company’s annual meeting urging more disclosure.

Special Resolution 25 received 98% of shareholder support, according to a tally of the vote. The resolution needed 75% of the votes to make it binding. BP management had urged its passage.

"Climate change is a clear challenge for the world," Chairman Carl-Henric Svanberg told shareholders on Thursday. He noted that BP's energy outlook to 2035 is forecasting global demand for energy over the period to increase by 37%, with greenhouse gases increasing by 25% (seeDaily GPI, April 2; Feb. 17). "The world has made encouraging headway in disconnecting these historic trends through energy efficiency and low carbon initiatives. But the increase is still in excess of what scientists and governments say is needed to keep the temperature rise within 2 degrees."

BP wants an "orderly transition to a low carbon economy." Svanberg said. "First and foremost, we want to put a price on carbon as we believe is the most efficient way to steer toward lower carbon alternatives. Second, we want to push for a transition from coal to gas. This reduces emissions to half and will buy critical time over the next decades as renewables mature."

BP, like many of its peers, for years has applied a carbon price in making investment decisions (see Daily GPI, Dec. 5, 2013). Although many U.S. legislators have fought against imposing carbon taxes, BP, ExxonMobil Corp. and Shell executives have argued that taxing carbon dioxide (CO2) emissions actually creates incentives to invest in research and development (R&D) to implement new technologies (see Daily GPI, Feb. 13; April 16, 2010; Feb. 14, 2007).

Group CEO Bob Dudley said BP executives had "consistently advocated for stronger government action and have been open and transparent about our environmental impact. The challenge ahead is to make the case for the necessary role of fossil fuels, and further transparency supports that case. BP's portfolio is already 50% natural gas. We are working on a number of major projects that will add more gas," including Shah Deniz 2 in Azerbaijan, the Southern Gas Corridor to Europe, Khazzan in Oman and a $12 billion investment in Egypt.

The shareholder resolution followed announcements by high-profile investors that include the Church of England, which have pressured BP and Royal Dutch Shell plc to disclose climate risks. Last December the Church of England became the first mainstream religious organization in the UK to raise the prospect of divesting its fossil fuel investments unless the oil majors took more action to tackle climate change.

The Church of England's announcement was followed with action in January by a coalition of about 150 churches and pension funds that together represent about 1% of BP's and Shell's total shares. The groups, led by ClientEarth and ShareAction, urged the oil giants to assess, announce and tackle issues posed by changes in the climate. Shell, which is holding its shareholder meeting in May, already has voiced support for a similar resolution.

The coalition praised the resolution's passage by BP shareholders.

"As a result of the vote, annual reporting at BP will now be significantly expanded with additional transparency around operational emissions management, asset portfolio resilience, low carbon energy R&D and investment, executive incentivization during the low carbon transition and public policy activity relating to climate change," the coalition said.

The resolution also calls on BP to commit investments toward renewable energy, a business in which the oil major at one time was a global leader. BP today invests in energy efficiency technologies and alternative energies for operations and products, which include R&D investments through proprietary research, corporate venturing investment and university programs.

In fact, BP, which years ago advertised that the company’s business went "Beyond Petroleum," in 2006 received a score of 90 points out of 100 from investor coalition Ceres for working to develop climate-friendly technologies (see Daily GPI, March 22, 2006). However, in 2009 BP downsized the alternative energy unit in part because of the recession (see Daily GPI, July 2, 2009).

"Based on mixed investment outcomes in alternative energies, where we invested $8.7 billion since 2005, we are now focused on scalable Brazilian biofuels, which do not require a subsidy or regulatory regime to be cost effective," the board said in its support for the resolution. "Brazilian biofuels will now compete for capital with other business opportunities in our portfolio. Other alternative energies businesses have been divested or disbanded, with the exception of U.S. wind, which is currently retained as an operational asset, with no further growth investment planned."

Source: naturalgasintel.com

Gas Pricing Reform in India – Implications for the Indian gas landscape

Most discussion on the future of the market for internationally traded gas focuses on the ‘swing towards Asia’. Specifically, China and India, the world’s two most populous nations, are frequently highlighted as major drivers of future demand. Yet, there is considerable ambiguity over the assumptions underpinning this observation, particularly with regards to India. In fact, despite several years of relatively high economic growth in the last decade, it is difficult to make a confident and accurate assessment of India’s potential as a major Asian gas market. Official government forecasts carried out within a central planning framework tend to be overly optimistic, whereas projections by multilateral organisations tend to be cautious but confused. The reason for this lack of clarity is that the Indian gas sector is broadly characterised by two moving parts: one which has prices and quantities set by the Indian government, and another which utilises gas at market (LNG import) prices. Additionally, there is some overlap between the two, further complicating attempts to assess these as separate markets. The lack of a clear pricing signal therefore makes it difficult to determine future levels of demand.

This paper analyses whether or not recent reforms to the pricing of domestic gas could potentially change the Indian gas landscape by making price signals clearer. It investigates three important questions: First, could gas pricing reforms reverse the recent decline in domestic production? Second, could they lead to new upstream investments in gas? Finally, what is the impact of the reforms on downstream consuming sectors? The paper begins with an analysis of the 2014 gas pricing reform, followed by an overview of demand, supply and consumption. It then delves into the three broad questions posed above, and concludes with observations on whether reforms to gas ‘price formation’ (as opposed to ‘price level’) in India are in fact achievable, or whether they will continue to elude successive governments, and on whether India can ever be Asia’s next gas market ‘Goliath’.

Source: http://www.oxfordenergy.org/2015/04/gas-pricing-reform-in-india-implications-for-the-indian-gas-landscape-2/

International Energy Agency chief economist Fatih Birol says India needs $100 bln investment

India must spend $100 billion every year to meet the ballooning energy demand of its expanding economy, the chief economist of International Energy Agency told a conference on Monday.

"India needs three things for its energy sector: investment, investment and investment," Fatih Birol said, laying emphasis on India's need to attract investment in the energy sector.

The country's energy needs have rocketed in the past decade, when its economy grew at an average pace of more than 7 percent despite global hiccups. Many of India's power plants are lying idle, while coal, oil and gas production have struggled to rise for years.

Meanwhile, a growing prosperity has pushed up energy needs of households, offices and factories, leaving a wide gap between the demand and supply in an economy, which is one of the world's fastest growing today. At least a fourth of its citizens are not connected to the grid power.

Birol said the investment of $100 billion every year should be split with one-fourth going to coal, oil and gas sectors and the rest to develop power generation and transmission capacity. He didn't offer details on how he had arrived at the $100 billion a year figure.

For an investment of this scale, India needs to attract international capital, he said. International investors are ready to invest but are waiting for the "right conditions" of price and legal framework, Birol said.

"When I look at the last six months of the government, they seem to be moving in the right direction," Birol said, referring to the gas prices and other policy pronouncements. He expects the government to resolve the legal issues in a year, which will enhance the confidence of the private investor.

Retrospective tax legislation has rattled international firms in India. India's demand from oil and gas explorer Cairn India and former UK parent Cairn Energy Plc to pay about Rs 20,000 crore in tax and interest for an eight-year-old transaction has induced uncertainty in the investment climate.

Late last year, the government introduced a formula for domestic gas price. The formula is based on international gas prices and revised every six months.

Source: Economic Times

RIL's MJ-1 discovery may hold 1.4 Tcf of gas resources

Reliance Industries’ (RIL) most significant recent gas discovery, MJ-1, in KG-D6 block may hold 1.4 trillion cubic feet (tcf) of gas resources, roughly half of these in the block’s main gas fields.

Located about 2,000 metres below the producing D1-D3 field in the eastern offshore KG-D6 block, MJ-1 might hold contingent resource of between 0.988 tcf (low estimate) and 2 tcf (high estimate) of gas and condensate, according to the firm’s minority partner, Niko Resources of Canada. Niko cited an “independent resources evaluation report for the MJ discovery in the D6 block from Deloitte LLP” to state that the find could hold a best case estimate of 1.4 Tcf of gas and condensate.

The estimate is a comparison to the downgraded reserves of 3.10 tcf in the main Dhirubhai-1 and 3 gas fields, which have been on production for six years. If proved correct, MJ-1 would be the third biggest gas field in KG-D6 after D1&D3 and R-Series, which hold about 2 Tcf of recoverable reserves.

RIL, the operator of the Krishna-Godavari basin KG-D6 block with 60-per cent interest, has so far made 19 gas discoveries, of which D1&D3 were put on production in April 2009. MA oil and gas field was put on production in September 2008.

The Canadian firm holds 10 per cent interest, while the remaining 30 per cent is with BP plc of UK. Niko, which had earlier this year put up its stake in the KG-D6 block for sale, got the resource estimation done on its own. RIL and BP were not party to the exercise.

“Deloitte’s best case estimate of gross unrisked contingent resources of 1.4 tcf of equivalent relates to the Central (North), Northern and Central (South) fault blocks that were drilled by the MJ-1, MJ-A1, and MJ-A3 wells, based on an estimated a real extent of approximately 24 square kilometres, approximately twice the real extent of the analogous MA field that is currently producing,” it said.

Regulatory approval from the Indian government will be required to bring this field on-stream, it said, adding block operator RIL was currently doing appraisal work, and development planning work is underway.

NIKO RESOURCES ON THE DISCOVERY

MJ-1 might hold contingent resource of between 0.988 tcf (low estimate) & 2 tcf  (high estimate) of gas & condensate, according to Niko Resources

Niko cited an “independent resources evaluation report for the MJ discovery in the D6 block from Deloitte LLP” to state that the find might hold a best case estimate of 1.4 tcf of gas & condensate

Niko, which had earlier this year put up its stake in the KG-D6 block for sale, got resource estimation done on its own, and RIL and BP were not part of the exercise

Source: Business Standard

Oil Min submits proposal on premium for risky gas fields

The Oil Ministry has submitted a proposal to the Finance Ministry for paying a premium to natural gas producers for difficult fields, a top official said. "We will very soon decide" on the premium to be paid for gas discoveries in deepwater, ultra-deep sea or high- temperature and high-pressure fields, Oil Secretary Saurabh Chandra said on Wednesday.

A formula, based on recommendation of the Directorate General of Hydrocarbons, has been approved by Oil Minister Dharmendra Pradhan and it has now been forwarded to the Finance Ministry for vetting. The government, while approving a new gas pricing formula based on international hub rates in October last year, had decided that new gas discoveries in deepwater, ultra-deep sea or high-temperature and high-pressure fields will be given a premium over and above the approved price. Gas price, according to the formula, was USD 5.05 per million British thermal unit till March 31 and has subsequently been cut to USD 4.66 in line with international movements.

The premium to gas from difficult fields will be over and above this rate. An official said that a graded formula for the premium based on difficulty of the field is on the anvil. DGH had in January submitted a formula for calculating the premium on such projects. The Cabinet headed by Prime Minister Narendra Modi had in October approved a revised natural gas price and stated that discoveries made after this announcement in difficult regions would be given a premium as exploration and drilling is costly and challenging. The official said DGH had suggest different rates of premium based on a formula for deepwater, ultra-deep sea and high-pressure and high-temperature (HPHT) fields.

Source: Moneycontrol