KG drought fuels clamour for pooling of gas

With 25 power plants across the country not getting any gas from Reliance Industries' D6 block in the Krishna-Godavari basin (KG-D6) since early this week, analysts say the cost of power for consumers will go up substantially. For, these companies will have to either buy more expensive fuel from other sources or shut the plants.

"There are not many options. We either shut down or the government makes some alternative plan," said a top official of a power company, asking not to be named.

Faced with huge losses, the power companies are now making a strong case for a core sector gas pooling mechanism. Under this, domestic gas production and imported gas will be treated as one and costs shared equally by all companies, including fertiliser companies. If this proposal is cleared, the power companies can supply at Rs 5-6 a unit, instead of Rs 8-8.50 a unit if they go for spot purchases to fuel the plants.

"At present, when gas production falls in India, supplies to power plants are immediately discontinued," says Ashok Khurana, director-general of the Association of Power Producers. They are, by government decision, below fertiliser companies on the conumer priority list. "If, " says Khurana, "we combine the gas requirements of both fertiliser and power companies, the costs will come down substantially for the latter. This (pooling) will help run power stations at 65-70 per cent plant load factor."

He said core sector pooling could also be applied for the new gas finds of Oil and Natural Gas Corporation and other companies.

The consistent fall in production is also bad news for Reliance and its investors. Global brokerage firm Nomura said the recent fall in KG-D6 output had been sharp, worrisome and much higher than expected.

"We think there is a downside to our fiscal year 2014-15 assumption of 17/15 mscmd (million standard cubic metres a day of output), respectively, but we believe impacts on earnings will be minor. Each 5 mscmd reduction in average production reduces FY15 earnings by share (EPS) by Rs 2 a share or 2.5 per cent for Reliance. We think production declines are likely to continue for some time," the brokerage said in a note to its institutional clients.

It further says that even as relations between Reliance and the government and the oil sector regulator, the directorate general of hydrocarbons have eased, there are still differences over several issues. "Apart from technical issues, a quick and early settlement on the CAG (Comptroller and Auditor General) audit issue and agreement on gas pricing are a must, in our view, for significant investments to commence," says Nomura.

Production from the K-G fields has dipped to an all-time low of 17.3 mscmd. Of this, about 15.2 mscmd was supplied to the, top priority, urea-making fertiliser plants. Another 2 mscmd was consumed by state-owned GAIL's LPG extraction units. The rest was used to fire the pipeline connecting the K-G basin to Gujarat.

Reliance is expecting the government to raise gas prices next year from the present $4.2 a unit to $8 a unit.