State-owned Oil and Natural Gas Corp (ONGC) logged a Rs 40 billion (Rs 4,000 crore) loss on natural gas output in the financial year ended March 31, 2018, as the government mandated price for the fuel was less than the cost of production.
As per a new mechanism approved by the government in October 2014, the price of domestically produced natural gas is to be revised every six months -- April 1 and October 1 -- using weighted average of rates prevalent in gas surplus markets like Henry Hub (US), National Balancing Point (UK excluding Russia), Alberta (Canada) and Russia.
Using this formula, the price for April to September came to $3.06 per mmBtu as compared to $2.89 in previous six months.
"Our average cost of production is about $5.14 per mmBtu. It comes to about $3.59 per mmBtu without taking into account return on capital, the official said. "Gas production is now a loss-making business as irrespective of cost of production we have to continue paying royalty and other taxes."
Prices have been less than $4 since October 2015. "Natural gas is no more a profitable business because cost of production is very significantly higher than current gas prices," the official said. ONGC, he said, has sought a review of the natural gas pricing formula.
The official said ONGC's significant discoveries in KG basin and Gulf of Kutch would need higher price to bring them to production.
Gas discoveries in the shallow sea off Andhra Pradesh on the east, and off Gujarat on the west are economically unviable to produce at the current government-mandated price of $3.06, he said, adding that in the absence of a viable gas price, it will have to mothball the $1.5-billion projects.
The official said the Krishna Godavari basin block KG- OWN-2004/1 is in shallow water and does not qualify as a 'difficult field', which get higher gas price of $6.78 per mmBtu. On the western side, the block GK-28 in Gulf of Kutch is a nomination block which does not qualify for higher rates, he said.
While the KG block will produce a peak output of 5.35 million standard cubic metres per day, the same from Gulf of Kutch block will be around 3 mmscmd. It would take a minimum three years to bring the gas finds to production.
The combined output is about 14 per cent of the ONGC's current output of 60 mmscmd. He said the KG block discoveries are in water depth of just about 8-metres, developing which is costly since ultra- shallow rigs are scarce and therefore expensive.