Kg Basin

KG Basin Gas Dispute & NTPC Group Colleagues: Nisha Barot 08 Manisha Choithani 13 Suchita Hotchandani 24 Rati Motwani 38 Dimpi Sanghavi 50

KG Basin

About KG Basin
KG basin is on the east coast of India and extends both to land and offshore.
D-6 Block was awarded to Reliance Inds and Niko Resoureces Ltd under NELP – I bidding round
Around 7 trillion cubic feet of natural gas was discovered by Reliance in the Krishna Godavari basin in October 2002
The on-land portion covers 28,000 sq km and the offshore portion, including deepwaters, covers an area of about 145,000 sq km. The basin has extensive seismic coverage in the on-land and shallow water areas.
More than 350 exploratory wells have been drilled in the basin, resulting in numerous oil and gas discoveries

About KG Basin
The company will initially produce up to 40 million metric standard cubic meters per day (mmscmd) of gas, which would be scaled up to 80 mmscmd by 2010.
The sale of gas from the initial production is disputed and the Bombay High Court has restrained the company from selling gas to any third party besides NTPC and RNRL.
RIL is embroiled in separate legal battles with NTPC and RNRL

Partition in 2005
Reliance Group was split up in Anil Ambani & Mukesh Ambani
RIL going to Mukesh Ambani & RNRL to Anil Ambani
Family pact was made in 2005 in which, RIL was to supply 28 million cubic meters of gas a day at $2.34 per million units to RNRL for 17 years

What Dispute is all about?
RIL agreed to sell RNRL 80mmscmd of gas from KG Basin for 17 years at $2.34 per mmbtu for its Dadari power plant.
RIL is not supplying the gas at agreed rate, RNRL went to court against it for not implementing this part of a family MoU signed when the empire was being carved up between the two brothers.

How Petroleum Ministry in picture?
RIL got the right to look for gas in the KG basin after signing a PSC with the government.
In the PSC, the government gets a share of RIL’s KG profits
Since profit are related to the price, the government said it has the right to vet each contract RIL signs to sell gas.
The ministry used this to reject the RIL-RNRL contract, saying it was not an arms-length one.

Controversy because….
No contract between parties
RNRL’s main contention was that RIL should supply gas on the terms it has agreed with NTPC
RNRL was not happy with the terms of the Gas Supply Master Agreement
RIL claims that the supply of gas from KG Basin to ADAG was not part of the division
Anil Ambani accused the petroleum ministry of favoring RIL

Root problem…
RNRL argues the ministry’s role under the PSC is limited to ensuring it gets fair share of profits theoretically
RIL can give the gas away free as long as it gives the government its share of the profit
Based on either the price fixed by the government or on a competitive arms-length bidding process

Root problem…
Interestingly, while answering question in parliament, the government stance for year has been that its role is limited to ensuring it gets its share of profits
The Bombay High Court has ruled that the family MoU does not violate the PSC- that is, the ministry could not cancel the RIL-RNRL agreement
RIL challenged this in the Supreme Court

Government’s stand on dispute
Government wants early solution to the gas dispute
Krishna Godavari basin is a national Property
30 MPs of left front asked the government to take over the distribution and marketing of gas from Basin
RIL has to pay the royalty to Government
Government has the right to fix the price & also dictate whom RIL sell to

How arm’s length price when no bidding?
In 2003, NTPC invited global firms to bid to supply it gas for its Kawas-Gandhar power plant for 17 years
RIL bid the lowest $2.34 per mmbtu and NTPC gave it a latter of intent in June 2004
The RIL-RNRL contract was based on this since it was signed in the same time period
Except that the RNRL contract was for 28 mmscmd of gas while the NTPC one was for 12 mmscmd

How arm’s length price when no bidding?
RIL later objected to some of the clauses in the NTPC tender and refused to supply the gas
NTPC went to court against RIL
RNRL argues that since the contract was based one NTPC one, it was an arms-length one

Court Verdicts Bombay High Court Ordered RIL to supply the gas as per the original statement The Bombay High Court allowed Reliance Industries to sell gas from KG basin at the government-approved price of USD 4.20 per mmBtu as an interim measure, while reserving judgment on a case brought by RNRL

Market Price of Gas
RIL had called for bids from buyers in April 2007, and they bid an average price of $4.33 per mmbtu
After some minor tweaking, the government accepted $4.20 per mmbtu as the price

Any loss to RIL or government at $2.34?
Compared to $4.20, they do
RIL’s cost of producing gas, according to the DGH (Directorate General of Hydrocarbons), is $1.28 per mmbtu, so it doesn’t really lose at $2.34 though it does earn less
The government’s gain/losses are more complicated
If gas prices are raised, fertilizer and electricity prices also go up and consumers end up paying more – to keep them at the same level, the hike required in government subsidies will be much more than the increased profits it gets when the gas is priced at $4.20

RIL’s Capital Expenditure Under the PSC, RIL first gets to recover its capital and operating costs out of whatever revenues get generated; it is only after this that the government get a share in the profit – this share rises as RIL’s revenue to cost ratio rises If its capital expenditure goes up, the government’s profit fall The DGH says the capital expenditure has been verified by independent experts including the CAG (Comptroller & Auditor General of India) – the CAG’s report, however, has not been made public

ESTIMATED COST OF PRDN OF KG BASIN Sr.No Particulars Amt (in mn) 1 G & G Studies 34.67 2 Reservoir and Completion Studies 22.66 3 Development Wells 1164.58 4 Prdn Facilities 13.82 5 Eco-Protection 4.3 6 Administration 20.5 7 IT 9.46 8 Kakinada Captive Berth 54.96 9 Owned Support,Intervention Vessel and Helicopter 150 5196.58

RIL’s Calculations* Post-Well Expenditure Cost ($/MMBTU) RIL’s development Exp. (Capex) in KG 0.54118 Production (Operating) Exp. 0.2211 Interest Cost 0.1316 Total post-well exp. 0.8945 Pre-Well Expenditure Cost ($/MMBTU) Exploratory Exp. (Capex) 0.144 Production Exp. (10% of Capex*) 0.170 Total pre-well Exp. 0.314 Royalty @ 5% on margin ($4.2-$0.314) 0.02 TOTAL NET COST OF PRODUCTION 1.43

RIL’s Capital Expenditure
RNRL has pointed out that these experts weren’t really independent and were connected with RIL in various ways
Besides, two of the four member management committee that okays RIL’s costs for the KG basin are employees of RIL under the PSC, this will be common for all contractors, not just RIL

At sales price of $2.34 Even at a sales price of $2.34/mmbtu, RIL maintains a profit margin of a little over 60%

IF JUDGEMENT IS IN FAVOR OF NTPC AND RNRL
RIL's revenues from gas sales could take a big hit if the judgment is indeed operationalised.
The judgment would lead to Reliance Industries suffering losses to the tune of Rs 3,600 crore.

Gas Utilization Policy
Fertilizer: Ideal feedstock for Urea production
LPG & Petrochem: Need to boost domestic LPG production to reduce imports
Power Plants: All sources of energy, included coal and gas, need to be harnessed to achieve 8-10% growth
City Gas: Vital necessity for urban dwellers
Refineries: Currently using costly alternatives like crude/fuel oil for processing and burning naphtha
Other industries: Sponge Iron, ceramic units

IMPACT ON SHARE PRICES OF RIL AND RNRL DUE TO JUDGEMENT

ROLE OF RNRL
ADAG claims right over 70 per cent of KG-D6's initial output of 40 million standard cubic meters per day by virtue of a family split
The 28 mmscmd gas is to be used as feedstock at the 3,500 MW plant at Dadri in Uttar Pradesh

IMPACT ON RNRL
It will result in lower cost of production.
Whatever power they produce from 28 billion cubic meter of gas, they will have to pay about Rs 3,600 crore less
In case Reliance Industries produces more than 80 million cubic meter per day, RNRL can claim 40% on that excess production too

IMPACT ON RNRL
If RNRL is able to get gas at $2.34 per unit, RNRL will add another $1 per unit to the $2.3 per unit rate at which it is getting gas, towards transportation charges and marketing margins in order to supply to Reliance Infra and Rel Power.
Some calculations show the quantity may fall short by 20 per cent at Dadri. The excess gas could be thus billed at a higher rate of $4.2 per unit.

IMPACT ON NTPC
NTPC doesn’t lose a single paisa whether it buys gas from RIL at $2.34 per mmBtu or at $4.20
National Tariff Policy, by January 2011, PSUs like NTPC will have to participate in open bids to sell their power
NTPC has to pay a higher price for RIL gas, it will never be able to compete with others

IMPACT ON NTPC
Offered 50 per cent higher liabilities than what NTPC was giving us for non-acceptance of delivery of gas
Tapti trading at $5.7 and GAIL at $6.75

IMPACT ON FERTILIZER SECTOR
Natural gas constitutes about 60% of the cost for production of fertilizers in gas-based units vis-à-vis 75% in naphtha-/fuel oil-based units.
Prices of urea is government regulated and currently fixed at Rs 4,830 per tonne.
Switching over to substitute feedstocks based plants to natural gas is estimated to generate another 7.2 mmscmd of gas demand.
Fertilizer sector has been allocated 15 mmscmd of gas from the first 40 mmcmd gas production from KG D-6.

CONCLUSION

THANK YOU

Kg Basin

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