Taking a leaf out of Reliance Industries Ltd's playbook, state-owned Oil and Natural Gas Corporation (ONGC) is forming a new subsidiary for a gas business that could be used to bid and buy gas from the firm's own fields.
The board of ONGC at its meeting on February 13 approved the creation of a new wholly-owned subsidiary company for gas and liquefied natural gas (LNG) business value chain subject to necessary approvals, according to the firm's third-quarter earnings announcement.
"The company is being formed with the objective of sourcing, marketing and trading of natural gas, LNG business, Hydrogen enriched CNG (HCNG), gas to power business, bio-energy/ bio-gas/ biomethane/ other biofuels business, etc," it said.
(Also Read: Oil minister blames artificial price mechanism by oil-producing nations)
ONGC may use the new subsidiary to buy any new gas that the firm produces from fields such as KG-D5 in the Krishna Godavari basin, people with direct knowledge of the matter said.
The government had in October 2020 allowed affiliates of gas producers to buy the fuel in open auction.
This policy change allowed Reliance to buy two-thirds out of the additional 7.5 million standard cubic metres per day of gas it along with partner BP plc of UK plans to produce this year from the new fields in KG-D6 block.
"ONGC too can look at this option now. The new subsidiary can participate in any auction that ONGC will do for incremental gas from KG-D5 block," a source said.
Besides ensuring competition and fair price discovery, the ONGC subsidiary can then sell the gas so sourced to firms such as Mangalore Refinery and Petrochemicals Ltd (MRPL) at a margin.
This would help ONGC earn better margins on the gas produced.
"Right now gas is a loss-making business for ONGC. The government controls gas price which is less than cost of production," the source said.
The government has fixed a price of USD 1.79 per million British thermal unit for ONGC's fields. This is half of the cost of production.
It allows a higher rate of USD 4.06 per mmBtu for difficult fields such as deepsea fields (KG-D6 and KG-D6) but even that is less than the cost of production from highly capital intensive projects.
The current regulation means even if Reliance discovered a price equivalent of USD 6-7 per mmBtu for the 7.5 mmscmd of new gas from KG-D6, it would get only USD 4.06 till March 31.
The same would apply for ONGC. It might discover a rate higher for the 15 mmscmd incremental gas planned from KG-D5 block but it can get only USD 4.06 as per current price.
"So, essentially the ONGC's gas subsidiary can bid and buy KG-D5 gas. It will pay ONGC USD 4.06 per mmBtu but can sell to MRPL or any other customer at a price higher than that, ensuring that the gas business becomes a viable proposition," the source said.
The government has given operators the freedom to discover market prices but this rate is subject to a pricing ceiling or cap that the government notifies every six months. The cap for six months to March 31, 2021 is USD 4.06 per mmBtu.
In the February 5 auction, Reliance O2C Limited, an affiliate of Reliance Industries Ltd, picked up 4.8 mmscmd out of the 7.5 mmscmd gas auctioned.
State gas utility GAIL (India) Ltd won 0.85 mmscmd of supplies while Shell picked up 0.7 mmscmd.
Adani Total Gas Ltd got 0.1 mmscmd, Hindustan Petroleum Corporation Ltd (HPCL) 0.2 mmscmd and Torrest Gas 0.02 mmscmd. Other buyers included IRM Energy (0.1 mmscmd), PIL (0.35 mmscmd) and IGS (0.35 mmscmd), they said.
Sources said the gas was bought at a price of USD 0.18 per million British thermal unit discount to JKM (Japan/Korea liquefied natural gas import price), that is price of JKM (minus) USD 0.18 with tenures ranging from 3 to 5 years.
Reliance O2C is the new unit that holds the firm's refinery and petrochemical assets.
Earlier in November 2019, 5 mmscmd of natural gas was sold at a price in the range of around 8.6 per cent of Brent crude oil for tenure ranging from 2 to 6 years. That gas went to buyers like Essar Steel, Adani Group and state-owned GAIL.
Reliance-BP started production of gas on December 18 last year from the R Cluster ultra-deep-water gas field in block KG-D6 off the east coast of India.
The duo are developing three deep-water gas projects in block KG-D6 -- R Cluster, Satellites Cluster and MJ -- which together are expected to meet around 15 per cent of India's gas demand by 2023.
ONGC is developing a set of discoveries in the KG-D5 block which sits next to Reliance's D6 area.
ONGC's fields, which began production last year at a limited rate of 1 mmscmd, are estimated to have peak production rates of 16 mmsmd of natural gas and 80,000 barrels per day of oil.