Govt hopes to save $9 bn in import bill as RIL gas flows

Expects its profit share in the block at $14 billion.

After over six years of bagging the KG-D6 block in the Krishna Godavari basin during the first round of the New Exploration and Licensing Policy (Nelp), Reliance Industries (RIL) commenced gas production from the block on Thursday.

The block, touted as the country’s biggest find in 30 years, and one of the world’s largest deepwater production facilities, is located in the Bay of Bengal.

“Reliance takes great pride in this success. The clean energy from the discoveries of the KG-D6 block will be a boost for energy security and growth of India,” said Mukesh Ambani, Chairman and Managing Director, Reliance Industries.

According to Petroleum Secretary R S Pandey, India will save $9 billion in oil import bill annually with the beginning of production from the fields.
 

KG D6 GAS ALLOCATION
Sector	Allocation (in mscmd)
Fertiliser	14
Power	18
CGD	5
LPG	3
Total	40

“Revenues from KG-D6 gas sales are expected to be $42 billion over the 11-year life of the field, and the government’s profit share at a minimum $14 billion,” added Pandey.

Analysts tracking the sector believe that once all of RIL’s gas from the KG basin comes on stream, India, Asia’s third largest importer of oil, could shave at least $20 billion off its oil import bill, which is projected at around $77 billion this financial year. India’s net oil imports in FY2008 were $57 billion. Total certified reserves of the KG-D6 basin are said to be 11.3 trillion cubic feet.

The initial gas production — around 15 million standard cubic metres per day (mscmd) — from the discoveries of the KG-D6 block will be sold to existing fertiliser companies, resulting in substantial reduction in subsidy burden of the government. At a later stage, gas would be allocated to power sector, city gas distribution and to liquefied petroleum gas (LPG) bottling plants. The production of gas would be ramped up to 80 mscmd by next year.

According to a Citigroup report released on March 25, India’s current urea demand is 26 million tonnes, out of which 6 million tonnes per annum are imports.

The demand for gas from the fertiliser sector is 44 mscmd and supply is only 30 mscmd, leading to a deficit of 14 mscmd.

The total subsidy on urea is currently estimated at Rs 27,516 crore — Rs 11,000 crore on imported urea and Rs 16,516 crore on domestically produced urea.

Sector analysts say that at the current price of naphtha, which is about $10 per million British thermal unit (mBtu) KG-D6 gas would be available at $6 (mBtu) — resulting in direct savings of $4 mBtu.

“Thus the gas would result in savings of $690 million per annum or Rs 3,450 crore to the nation in terms of fertiliser subsidy. This would amount to around 21 per cent of subsidy on domestically produced urea,” said a Mumbai-based sector analyst who did not wish to be quoted.

KG basin gas will help power and fertiliser plants — which consume 70 per cent of the gas available in the country — to operate at full capacity. Inadequate gas forces them to operate at 50-60 per cent of capacity.

The first 15 fertiliser plants that will get all of the initial output are likely to get the gas within four days. Some distant plants would receive gas in about 15 days.

The government has set the price of gas at $4.2 per mBtu, excluding transportation costs and taxes. However, the gas is expected to cost $6-7 per mBtu, after adding transportation charges and taxes.

This January, the Bombay High Court in an interim order allowed RIL to sell natural gas from its field at $4.2 per unit.