GSPC faces pricing challenge for K-G gas

New formula puts gas price at $ 8.4 against GSPC's proposal of $14.2

The Krishna-Godavari (KG) basin is turning out to be a difficult terrain for Gujarat government’s hydrocarbon player, Gujarat State Petroleum Corporation Ltd (GSPC). Following the new domestic gas pricing formula announced by the Centre last month, GSPC’s ambition to charge KG gas in parity with the imported liquefied natural gas (LNG) at $14.2 a million British thermal unit (mBtu) has fallen flat.

Sources say the new price fixed according to the Rangarajan formula would fall short of covering the company’s already-stretched financial condition.

“GSPC was planning to price the KG gas at $14.2 per mBtu. But Central government’s decision of pricing domestic gas at around $8.4 mBtu has put the company in trouble. This would mean that GSPC’s earnings from its DD West block in KG Basin will get affected. It is already sitting on a huge debt pile,” said an industry source, who did not want to be named.

So far, GSPC has incurred an investment in excess of Rs 7,000 crore towards exploration and development activity at its DD West Block. The company’s total debt is running over Rs 12,000 crore.

“Things are uncertain as of now. As a future strategy (for gas pricing), we can only approach the government again for our price,” said a GSPC official on condition of anonymity. Tapan Ray, GSPC’s managing director, did not respond to calls made to him.

On June 28, the Cabinet Committee on Economic Affairs approved a formula that put the gas price in the range of $7.5 to $8.4 an mBtu, which is half of GSPC’s proposed price of $14.2, which was calculated after an elaborate market price discovery exercise in February this year. The company had sought the petroleum ministry’s approval for the same, but has not received any communication so far.

According to insiders, the road ahead for the company remains tough. Huge debt burden and realisation at new rate of around $8.4 would pose a major challenge to the company.

“Even private players like Cairn India had sought to charge the gas at around $8 per mBtu. This shows that this level of price is fairly viable for explorers. So, if GSPC is uncomfortable at this price, then there is some real problem with the company,” an energy analyst from Mumbai informed.

Industry players maintained that the price set by the Centre is attractive for gas distribution companies selling compressed natural gas.

“The current price set by the central government is the cheapest possible. Back-of-the-envelope calculations suggest the price of the prospective shale gas would work out at $8-10 per mBtu. So, the Centre’s decision to price gas at $8.4 is quite acceptable,” said an official with a private sector energy player.

Earlier, the company had given indications to start commercial production from its DD West block between July and September this year. However, during a recent conversation with company officials, they claimed the commercial production may start by the end of this year.

“The operations are at an advanced stage. We will be able to start commercial production by the end of this year,” said a source close to the development.