Lack of pricing clarity to hit CBM firms

According to the formula, the price of domestic natural gas is set to increase from $4.2 per mBtu to $8 an mBtu

With India’s natural gas sector ready to usher a new pricing regime from April, existing coal-bed methane (CBM) companies are likely to feel the heat, as there is no clarity on those charging a higher gas price.

The uniform gas pricing formula will mean CBM players such as Great Eastern Energy Corporation Ltd (GEECL) and Essar Oil, which are drawing a higher price, will be paid a lower sum, according to the formula cleared by a panel headed by Prime Minister’s Economic Advisory Council chief C Rangarajan. According to the formula, the price of domestic natural gas is set to increase from $4.2 per million British thermal units (mBtu) to $8 an mBtu.

Ministry sources say companies such as Essar Oil and GEECL, which are selling at $9-22 an mBtu from their CBM blocks in West Bengal, will also be able to base prices on the Rangarajan formula.

MISCALCULATION

• Uniform domestic natural gas pricing would be applicable from April 2014, based on the Rangarajan formulae
• According to reports, Essar Oil is selling gas from coal seam at $9.16-11.63 an mBtu, while GEECL sells it at $8.46-22.01
• The government’s stand that those charging a higher price should be allowed to draw only Rangarajan panel pricing of around $8 an mBtu may cast a shadow on the prospects of these companies
• ONGC charges $5.71 an mBtu for CBM gas
•  The lack of clarity may also cause trouble for state-run Coal India, which got CBM exploration rights from its existing blocks on a nomination basis

“As of now, these companies will have to go according to the Rangarajan formula; they can avail of the pricing, according to that. If they have any complaint, they should raise that with the ministry,” said an official.

Currently, GEECL is producing 14.73 million standard cubic feet a day (mscfd) and plans to increase production to 100 mscfd in four-five years, with an additional investment of Rs 1,500 crore.

When asked about this, a senior company executive told Business Standard, “The Rangarajan committee had set only a bottom ceiling; there is no top ceiling for prices operators can draw. Moreover, we are selling at arm’s-length pricing and there is no cost recovery factor in CBM.

Also, our prices are already approved by the government and we have contracts in place till 2035.”

While Essar Oil is producing about 0.1 million standard cubic metres a day (mscmd), GEECL is producing 0.57 mscmd from the Raniganj (south) block near Asansol. Based on the recommendations of the Rangarajan panel, the government had, in June 2013, decided on a uniform pricing formula for all domestic gas. For conventional gas, this will involve a near-doubling of prices; for CBM producers, it may mean a controlled-pricing regime in which they will have to reduce the price in line with the formula.

An Essar Oil spokesperson said, “We are supportive of the initiative from the ministry of petroleum. It is an important step towards a true market-oriented gas price across India. We believe it will underpin acceleration in the development of India’s gas industry.”

To protect the government’s royalty and production-linked payment, only the minimum well head price is approved for CBM. According to a petroleum ministry response to the Lok Sabha in December 2013, Essar Oil is selling gas from coal seam at $9.16-11.63 an mBtu, while GEECL sells it at $8.46-22.01 an mBtu. State-run ONGC charges $5.71 an mBtu.

Earlier, an Essar Oil spokesperson had told Business Standard the company sold to about half a dozen customers here and planned to ramp up production to three mscmd by 2014. Essar Oil received phase-III environmental clearance for its CBM gas field at Raniganj in March 2013 and was allowed to drill 650 wells, against 135 wells earlier.

Raniganj, in which Essar Oil holds 100 per cent interest, is a 500-sq km block with total proven and probable reserves of 113 billion cubic feet, as independently evaluated by consultants Netherland, Sewell and Associates. Essar Oil’s total investment on the block is Rs 4,000 crore, which had been tied up, said a company spokesperson.