KG Gas: The Flame Of Truth (ENGLISH)


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Documents aimed to assist you in navigating the various claims and counter claims on KG D6 in the context of India’s energy security

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KG Gas: The Flame Of Truth (ENGLISH)

  1. 1. Page 1 of 13    KG Gas The Flame of Truth
  2. 2. Page 2 of 13    Biggest gainer of gas price increase is Govt owned ONGC and not RIL 1. Domestic gas sales in the country is currently about 80 mmscmd. 2. Out of this Government owned exploration and production (E&P) companies i.e. ONGC and OIL sell around 60 mmscmd or around 75% of the total sales. The remaining sale is by other players. 3. ONGC has recently stated on record that the gas price increase would result in Rs. 16,000 crore per year incremental revenue to ONGC. 4. Reliance Industries (RIL) operated KGD6 block currently produces only about 13 mmscmd. RIL owns 60% share in this block. Thus, RIL share of production is only about 8 mmscmd. 5. Thus, if ONGC which sells about 55 mmscmd of domestic gas and has incremental revenue of Rs. 16,000 crore per annum, how can RIL which produces only 8 mmscmd, have an incremental gain of Rs. 54,000 crore per year as alleged? 6. A gas price increase to $ 8 / MMBtu would result in incremental revenue of only about Rs. 2,400 crore per annum to RIL. Out of this RIL would pay royalty and taxes to the Government. The remaining money also would not be profit as RIL has still not recovered its investments in the E&Pbusiness. RIL (with its partners) have spent around $ 12.5 billion in the E&P sector in India. 7. Thus, to say that RIL would gain Rs. 54,000 crore per year due to the gas price increase is baseless and motivated propaganda. ** MMSCMD – Million Standard Cubic Meters per Day
  3. 3. Page 3 of 13    The fact is that the country will stand to lose Rs. 1,20,000 crore per year if the gas prices are not increased as the gas will have to be imported benefiting foreign companies. 1. Today the domestic gas consumption of core sectors in India is as follows: - Fertiliser – 31 mmscmd - Power – 24 mmscmd - Total – 55 mmscmd 2. Once the domestic gas price increases to $ 8 / MMBtu ( Energy unit), the impact of $ 4 / MMBtu increase in price would result in increase in fuel cost of core sectors as follows: - Fertiliser – 31 mmscmd i.e. Rs 9,300 crore per annum - Power – 24 mmscmd i.e. Rs 7,200 crore per annum - Total – 55 mmscmd i.e. Rs 16,500 crore per annum 3. The projected demand of these sectors is much more than 55 mmscmd. It is estimated that the total demand from these sectors would be 169 mmscmd by 2015-16, as follows: Demand (mmscmd) 2015-16 - Fertiliser 57 - Power 112 - Total 169 4. Based on recent statements of ONGC, its biggest discovery in KG basin may not be viable at even $ 8 / MMBtu and some fields in Mahanadi basin would require $ 11 / MMBtu. Thus, if domestic gas prices are not increased, there will be no incremental production and existing fields will continue to decline. 5. If domestic gas is not available, these core fertilizer and power sectors would have to depend on alternate fuels. The cheapest alternate would be Liquefied Natural Gas (LNG) (or in case LNG is not available then even costlier fuels like naphtha, diesel). To meet the demand of gas the LNG import requirement would be as follows: Demand 2015-16 (mmscmd) Domestic supply mmscmd* LNG import reqd (mmscmd) - Fertiliser 57 31 26 - Power 112 24 88 - Total 169 55 114 (*ignoring the production decline due to no investments in E&P sector)
  4. 4. Page 4 of 13    6. The price of LNG import in the country today is $ 14- $ 19 / MMBtu. At $ 14 / MMBtu, the cost of LNG import to meet gas demand of core sector would be Rs 1,20,000 crore per year. 7. Thus, by not creating the right investment environment in the E&P sector through market based pricing the country will lose Rs 1,20,000 cr per year.
  5. 5. Page 5 of 13    It is being alleged that RIL deliberately reduced the production to take benefit of future price rise. This is technically impossible. 1. Any attempt to hold back production in an existing field immediately shows up in pressure anomalies in the affected wells. 2. Each well is like the release valve of a huge pressure cooker where the oil and gas has literally been cooking for millions of years - hold back gas in one well and the pressure difference is immediately apparent in the next well. 3. Simply putting it, if gas is being hoarded, pressure in all producing wells cannot decline uniformly. Pressure decline is a sure sign that the pressure cooker is running out of steam. 4. The decline of production in D1 & D3 fields in KGD6 block is due to reservoir complexity & geological surprises and not due to hoarding. 5. RIL has been insisting to appoint an international expert to check the volume of gas available for production from D1 & D3 fields in KGD6 block. 6. Reservoir surprises are common in the industry. There are various examples both in India & abroad: i. Neelam field (where the planned production of 130,000 bbls / day came down to 30,000 bbls / day within a couple of years into production) ii. Imperial Oil acquired by ONGC in Russia (where against planned production of 80,000 bbl / day current production is just about 15,000 bbl / day) iii. ONGC onshore / shallow water nomination blocks in KG basin (where expected production was 16 mmscmd but actually never crossed 6-7 mmscmd and has now fallen to less than 3 mmscmd) iv. Laxmi and Gauri fields in Cambay basin where production fell drastically after 2-3 years
  6. 6. Page 6 of 13    Cost of production of gas in India can never be $ 1 / MMBtu 1. ONGC currently has gas production only from on land and shallow water blocks. It does not have any production from a deepwater blocks like RIL operated KG- D6 blocks. 2. ONGC Chairman has recently stated that its cost of production from these onland and shallow water blocks is about $ 4 / MMBtu and it is hardly making any profit with current gas price of $ 4.2 / MMBtu. 3. Further, ONGC Chairman has stated that it will not be able to produce any gas from its deep water block in KG basin at current price of $ 4.2 / MMBtu. ONGC’s Vashishtha gas discovery in KG basin would be viable only at $ 6.7 / MMBtu. Further some of its discoveries in Mahanadi would be viable only at $ 11 / MMBtu. 4. It is a well-known fact that DGH has dis-allowed development of several gas discoveries since they are not viable at current gas price if $ 4.2 / MMBtu. 5. It is clear from the above statements of ONGC that gas production cost from a deep water block cannot be $ 1 / MMBtu 6. It has been stated by certain vested groups that the cost of production from KG- D6 block is less than $ 1 / MMBtu, quoting a letter by RIL to DGH; a. The cost of production as alleged is nothing but post-production costs between the well head and delivery point which in 2009-10 was estimated as $ 0.89 per MMBtu for that year. b. The figure was required because royalty on gas produced was to be paid at the well head value which value had to be derived by subtracting the post well head cost ($ 0.89 per MMBtu) from the approved price of $ 4.2 per MMBtu. c. Post production cost between the well head and delivery point is only a small component of the total cost of production. To calculate production cost, in addition to the post production cost between well head and delivery point (i.e. $ 0.89 per MMBtu), the expenditure incurred in discovery, appraisal, development production, maintenance will need to be considered; eg. cost of drilling of wells, production expenditure including work-overs expenditure, exploration & appraisal costs etc. d. In addition, RIL and its partners has spent around $ 4 Billion on nonKG-D6 blocks; $ 1.9 billion on relinquished blocks (failed exploration) and expected to spend another $ 1.8 billion on other NELP blocks till end of FY2014 where there is still no certainty of recovery.
  7. 7. Page 7 of 13    Gas price increase will not result in inflation as alleged. To sensationalize the issue of gas price, the impact of gas price increase on the economy / overall sector has been overstated by the vested interests. They have cited that gas price increase will lead to hike in the prices of fertilisers, power, food prices, cooking gas etc and that the common man will suffer. The impact of gas price increase in these sectors is marginal and is analysed below: 1. Fertiliser sector – a. It has been argued that, because of the increase in gas price, the cost of food grains would increase as the cost of fertilisers to the farmers would increase. b. Over the years the cost of fertilisers in the country has been rising due to increased import of fertilizer and increase in cost of production of domestic fertilizer. c. Despite the above, the Government has not increased the fertiliser prices sold to farmers and absorbed the increase through subsidy. d. Currently fertiliser sector consumes around 31 mmscmd of gas. The impact of increase in gas prices, assuming the entire burden is absorbed by the Government in the form of subsidy, would be around Rs 9,300 crore. e. ONGC has been on record recently saying that it would have incremental revenue of Rs 16,000 crore per annum when the gas prices will increase in April. f. In addition, Goverment would gain from additional royalty and taxes from other producers. g. Thus, increase in subsidy of the Government can be easily set-off through incremental revenues of the Government. 2. Power Sector – a. Gas based power generation is less than 5-8% of total power generation in the country. The remaining is through coal, hydel, nuclear etc. So it is huge exaggeration to say that gas price increase will result in substantial increase in the power tariff. 3. LPG – a. Gas based LPG production accounts for less than 12% of the total LPG consumption in the country. The remaining is produced in the refineries or is imported. b. LPG cannot be produced from RIL gas from the KG basin since it does not have C3/C4 fractions required to produce LPG. So accusing RIL on this count is only a misinformation. c. Gas based LPG is produced primarily by ONGC. Since ONGC produces LPG out of its own gas, the cost of its LPG production does not increase.
  8. 8. Page 8 of 13    4. CNG/ food prices – a. It has been argued that increase in gas price would increase inflation as cost of transportation of goods would increase. b. Unlike diesel, CNG reach is very minimal and CNG accounts for less than 3 % of the vehicular population in the country. c. In fact no trucks carrying food or other essential items run on CNG. d. It is to be noted that the Government has recently increased the domestic gas supply to all city gas distribution companies like IGL in Delhi, MGL in Mumbai, Gujarat Gas in Ahmedabad etc. to meet their CNG demand. e. Assuming the base price of $ 4 per MMBtu of the gas another $ 3.5 are added on A/C of distribution, transportation and other expenses to total cost in a city like Delhi is $ 7.5 per MMBtu (Rs. 23 per kg) whereas today CNG is being sold at $ 12 per MMBtu (Rs. 35 per kg). So any increase can easily be absorbed without increasing the price for the retail consumer.
  9. 9. Page 9 of 13    Why market price denied to gas producers when all producers of Oil (including private sector) get market price? 1. India is primarily an oil driven economy, as oil’s share is 75% of the total hydrocarbons consumed whereas dependence on gas is only 25%. 2. India is low on energy self-sufficiency and hugely dependent on imports specially in the hydrocarbon sector. While self-sufficiency in oil is at about 23%, for gas it is around 60% currently. 3. To improve India’s self-sufficiency, the Government had invited private sector participation in the E&P sector, by offering them discovered fields pre-NELP and later through NELP under which exploration blocks were offered. 4. India currently produces more oil than gas - while the current oil production in the country is around 38 mmtoe, the natural gas production in the country is about 30 mmtoe (including internal consumption by the producers). 5. The mix of private sector production versus public sector production (ONGC/OIL) in case of both oil and gas is about the same. In both cases its around 25%. The price of oil and gas both impact subsidy burden of the Government. In fact Government gives subsidy on Diesel, LPG, Kerosene and Petrol which are all produced from oil. In case of Gas, the Government gives subsidy only on fertilisers produced from gas. In fact gas related subsidies would be about one fifth to that of oil. 6. Both are produced by the private sector under similar PSCs with the Government 7. Both oil & gas are national resources 8. Then, why is it the case that all the oil producers in the country like Cairn, BG, ONGC, OIL get international import parity linked oil prices for their production, which is currently more than $ 18+ / MMBtu whereas all kinds of issues are being raised for gas prices even when they have been unilaterally fixed by the Government based on a formula that would give the domestic gas producer less than 50% of the import parity price of LNG. 9. It is clear that the entire propaganda is motivated.
  10. 10. Page 10 of 13    There was no contract to supply gas to NTPC at $ 2.34 / MMBtu 1. In 2003, RIL had bid price of $ 2.34 / MMBtu to NTPC in a tender process conducted by NTPC. 2. RIL at that time also had bid a market price to NTPC. In 2003, the oil prices were $ 25 / bbl (so $ 2.34 was around 9% of oil price in $ / bbl) and LNG prices were around $ 3.5 per MMBtu. So the bid was based on market conditions at that time and not based on viability/ economics of the fields 3. There was never a contract which was concluded with NTPC and RIL had only submitted a bid. In fact NTPC did not accept RIL signed contract at $ 2.34 under which RIL was committed to supply at that price, instead NTPC went to court. 4. Price approval of the Government of $ 4.2 was based on market price discovery in 2007 – again at that time oil prices were around $ 60 / bbl ($ 4.2 being 8% of oil prices) and LNG prices in India were $ 4 - 5 / MMBtu ($ 4.2 being 80-100% of LNG prices)
  11. 11. Page 11 of 13    Even after increase in gas prices, domestic natural gas would remain the cheapest fuel in the country Different Fuel rates in $/MMBtu. Fuel $/MMBTU Based on 1 Subsidized LPG 12 Rs.450/cyld 2 Non-Subsidized LPG 33 Rs.1134/cyld 3 CNG (New Delhi) 12 Rs.35/kg 4 CNG (Mumbai) 13 Rs.39/kg 5 Naphtha 24 Rs.66000/ton 6 Diesel (Subsidised) Mumbai 20 Rs.63/ltr 7 Diesel (Subsidised)Delhi 18 Rs.55/ltr 8 Fuel Oil 17 Rs.44000/ton 9 Kerosene (subsidised) 4.5 Rs.15/ltr 10 Spot LNG 19 $19/MMBtu 11 Domestic Natural Gas 8  
  12. 12. Page 12 of 13    By approving higher investment expenditure the Government allowed windfall revenue of Rs. 1.2 lakh crore ($ 20 billion) to RIL. CAG has remarked that there is a strong evidence that RIL is gold plating its capital expenditure: 1. The investment costs rose because of increase in reserves as well as 200 % to 300 % increase in the prices of commodities, goods and services internationally between 2003 and 2006. 2. The CAG audit for the years 2006 to 2008 never even once mentions the word “gold plating”. It also does not quantify any excess expenditure but only comments on the procurement processes. The PAC has asked the CAG to quantify so called excess expenditure upon which the CAG has assured that it will do so during the audit of the following years. The audit for the years 2008 onward in still ongoing. 3. In any case it is impossible to comprehend how costs can become windfalls unless the costs themselves are fraudulent. No such charge has been levied by anyone against RIL to date. A forensic audit has already confirmed that all expenses were in fact incurred and corresponding payments made to unrelated third parties.
  13. 13. Page 13 of 13    Some Ministers have been shunted out as Petroleum Minister because they were not favorable to Reliance. Further, gas prices have been increased now to favour RIL. 1. It is alleged that Mr. Mani Shankar Aiyar was shunted out as Petroleum Minister for not allowing increase in the cost of the investment. It is only a malafide propaganda, Mr. Mani Shankar Aiyar left the Petroleum Ministry in January 2006. The Revised Development Plan was first submitted ten months later in October 2006. 2. It is alleged that Mr. Jaipal Reddy was removed because he opposed higher prices to RIL, then Moily gave higher prices to RIL. Again factually incorrect. The price revision was due in April 2014. It was Mr. Jaipal Reddy (not Mr. Moily) who requested for the appointment of the Dr Rangarajan Committee in May 2012. It was on this Committees’ recommendations, the CCEA approved the revised gas price. 3. It is alleged that Congress-led UPA government "favoured" Reliance Industries Ltd by doubling gas prices to $ 8.4 with an eye on 2014 general elections and BJP is maintaining "silence" hoping to gain corporate funding for the polls. However elections have nothing to do with the price revision mechanism of the gas. The prices had to be revised not because of the elections but because the prevailing price formula ceases to be valid w.e.f. 1/4/2014. NELP as per the approved terms of offer had invited International bids on the promise that Contractors would be allowed to sell gas at arms-length market prices. Both the terms of offer as well as the PSC were framed in 1997 when neither the Congress nor the BJP was in power. The fact is that one of the complainants in the FIR was Secretary to the Cabinet which approved the terms that are now being implemented. How is it that he is questioning a decision that he was also a party to as the Cabinet Secretary?