Undeveloped deep sea gas output to get free market price in future

New Delhi: The government has approved a more remunerative pricing formula for natural gas to be produced from deep sea and other difficult-to-operate geological areas, finance minister Arun Jaitley said after the Union cabinet meeting on Thursday.

The new pricing formula will help companies like Oil and Natural Gas Corp. Ltd (ONGC), Reliance Industries Ltd and Gujarat State Petroleum Corp. Ltd (GSPC) to develop their deep sea discoveries and realize a price higher than what gas from other fields fetch now ($3.8 per unit).

Oil minister Dharmendra Pradhan told reporters after the cabinet meeting, chaired by Prime Minister Narendra Modi, that the new pricing regime will incentivize making investments into the country’s hydrocarbon sector.

“The price for deep sea gas would be determined by the weighted average of imported coal, LNG and naphtha,” said Pradhan. This would be the ceiling price. If there is sufficient competition in the domestic gas market when these discoveries come on production, the price could even get lower when producers float tenders for sale.

The decision to have a new pricing formula for deep sea and difficult-to-produce gas, linking it with the price of landed cost of alternative fuels like fuel oil, LNG and naphtha, was announced by Jaitley in Union Budget 2016-17. The exact price that gas from deep sea blocks will fetch when these fields start production a few years from now cannot be predicted at present as the landed price of imported alternative fuels would depend on market dynamics then. Anyway, freight rates get built into the landed price of imported fuels.

The move comes at a time when global energy companies are sharply cutting back their capital expenditure as well as workforce, which has begun to affect remittances to India from NRIs working in the energy sector.

The new pricing formula will apply to oil and gas fields discovered earlier but which are yet to be developed for production. ONGC, Reliance Industries and GSPC have fields in deep sea that are yet to be developed.

Accordingly, gas from Reliance’s KG D6 field in the Krishna Godavari basin, which went into production in 2009, will not benefit from the decision.

At present, the price of natural gas is determined by taking into account the average prices in gas-surplus countries like the US, Canada and Russia.

Source: Mint; 10 March 2016

URL: http://www.livemint.com/Politics/J1o43ve9EztejRCLnOQShI/Cabinet-clears-new-price-formula-for-undeveloped-gas-finds.html

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