Cabinet nod for new gas pricing;exploration regime liberalised

In major reforms, the government today approved pricing freedom to help monetise Rs 1.8 lakh crore of gas discoveries, brought in a more liberal fiscal regime for oil and gas exploration and decided to amend the mining laws to allow companies to more freely sell assets.
In a series of decisions aimed at attracting investment in the nation's oil and gas industry, the Cabinet headed by Prime Minister Narendra Modi approved pricing freedom for undeveloped gas discoveries in difficult areas but with a cap, a move that would result in 85 per cent jump in rates to USD 7.08 per million British thermal unit at current prices.

The price, which would not apply to those fields under litigation, would help monetise 6.75 trillion cubic feet of reserves in 28 discoveries that can add up to 35 million standard cubic meters per day of gas production for 15 years, Oil Minister Dharmendra Pradhan told reporters here.
India currently produces around 90 mmscmd of gas, hardly meeting 40 per cent of the needs.
Oil and Natural Gas Corp (ONGC), Reliance Industries and GSPC will get freedom to price gas from its idle discoveries in deepsea, ultra deepsea and high-pressure and high- temperature areas.
But this will be subject to a cap which would be lower of the one-year average cost of imported cost of fuel oil, or landed price of liquefied natural gas (LNG) or weighted average of imported price of coal, fuel oil and naphtha. Based on 2015 prices, the lowest of these averages comes to USD 7.08.

Pradhan said the Cabinet also approved replacing the controversial Production Sharing Contract (PSC) with simpler revenue-sharing regime for all future field auction.

A single licence for exploration and production of all forms of hydrocarbon in blocks bid out to firms offering the maximum revenue to the government would be given. Blocks would be allocated under open-acreage policy, wherein companies can submit bids for areas of their choice.
Also, the Cabinet Committee on Economic Affairs approved a policy for grant of licence extension to small and medium sized discovered fields like Panna/Mukta Tapti of BG Group of UK by 10 years on revised terms. The policy, however, kept out extension of Cairn India's prolific Rajasthan block.

"Our aim is to attract investments, boost production and take away government discretion," Pradhan said.
The new pricing guidelines would be applicable to future
discoveries as well as existing finds which are yet to commence commercial production as on January 1, 2016.
"However, in case of existing discoveries which are yet to commence commercial production as on January 1, 2016, if there is pending arbitration or litigation filed by the contractors directly pertaining to gas pricing covering such fields, this policy guideline shall be made applicable only on the conclusion/withdrawal of such litigation/arbitration and the attendant legal proceedings," an official statement said.

Reliance Industries has filed an arbitration against the government seeking higher gas price for its Dhirubhai-1 and 3 gas fields in the KG-D6 blocks. There are other discoveries in the block that are yet to begin production.
All gas fields currently under production will continue to be governed by the pricing regime which is currently applicable to them.
Reliance has about a dozen undeveloped discoveries in its KG-D6 block while ONGC has about 6-7 gas finds in neighbouring KG-DWN-98/2 or KG-D5 area. GSPC's block KG-OSN-2001/3 too has few gas discoveries which are awaiting beginning commercial production.
The new pricing formula, all undeveloped finds - 28 in all with known reserves of 6.75 Tcf and 10 other potential ones of firms like state-owned ONGC, Reliance and GSPC.

The cap rate of USD 7.08 per million British thermal unit under the new pricing regime would compare to USD 3.82 per mmBtu rate based on a formula approved by the BJP government in November 2014. Price as per this formula is slated to drop to USD 3.15 in April, a rate considered too low to meet cost of exploration.
Pradhan said caps would be revised six monthly based on one-year rolling average with a lag of one quarter. So the price cap for April to September would be based on average rate in 2015.
"Today's decision is expected to improve the viability of some of the discoveries already made in such areas and also would lead to monetisation of future discoveries as well."

International players like BP and private operators including Reliance Industries as well as ONGC have been seeking pricing freedom as the current rates make new investments unviable.
Pradhan said of small and medium-sized discovered fields whose contracts will be extended, 27 fields were awarded as a result of two rounds of bidding during 1991 to 1993, and one (PY-3) was separately put to bidding as discovered field.
For many of these fields the recoverable reserves are not likely to be produced within the remaining duration of contract period of these PSCs.
"The government share of Profit Petroleum during the extended period of contract shall be 10 per cent higher than the share paid till now," he said.

The present rates of royalty and cess would apply instead of concessional rates. This will lead to additional government revenue of Rs 2,890 crore.