Page 5 - AsianOil Week 09

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gas, meanwhile, slid by 8.26% y/y to 2.61bn cubic metres, while output in the first 10 months of financial year 2019-2020 fell by 3.87% to 26.43 bcm.
Production continues to fall despite various upstream reforms in recent years, owing to the fact that the India’s fields are maturing and not enough new fields are coming online to offset the declines.
Slow to change
The government’s staggered approach to gas pricing reforms is arguably one of the main reasons development has been slow. New Delhi may have granted marketing freedom to companies developing new fields, but legacy production remains constrained by state-mandated pricing.
Credit rating agency ICRA’s senior vice-president and group head, K Ravichan- dran, summed up this problem in December 2019, when he told The Hindu: “Price con- trols on domestically produced natural gas under nominated/pre-NELP/NELP regimes have not been remunerative, making further investments unviable in such fields. Also, high cess incidence for the legacy fields is pulling down the net realisation for the upstream companies.”
Domestic gas developers, in both the state and private sector, have long argued that India’s pricing system does not reflect market realities. New Delhi sets domestic gas prices every six months using the weighted average price of gas in hubs in the US, Canada, the UK and Russia. These prices are also set at a three- month lag to prevailing market rates in those four hubs. But producers say Indian gas prices should be higher than those found on interna- tional hubs, which enjoy a surplus of gas that India does not have.
The problem was highlighted when ONGC revealed that it had lost INR51bn ($694mn) between 2017-2018 and 2018-2019 because of low gas prices. Reports, however, suggest the government is gearing up for a new price cut for the six-month period starting on April 1.
Local newswire PTI quoted unnamed industry sources on February 23 as saying the government was likely to cut conventional gas prices by 25% from $3.23 million British thermal units ($89.34 per 1,000 cubic metres) to around $2.5 per mmBtu ($69.15 per 1,000 cubic metres). Production from challenging fields, which receive a price premium, could be cut from $8.43 per mmBtu ($233.17 per 1,000 cubic metres) to $5.50 per mmBtu ($152.13 per 1,000 cubic metres).
The move would reflect the recent plummet in liquefied natural gas (LNG) prices, owing to both warmer than expected weather patterns in East Asia as well as the spread of the coronavirus. However, it would also take India’s domestic gas prices to a two-and-a-half-year low.
PTI’s sources said the price cut would hit the revenues of gas producers, with ONGC’s revenue projected to fall by around INR30bn ($410mn) because of it.
What next
For India to turn its oil and gas production around it needs to inspire confidence in foreign investors. Domestic companies can only keep bidding unopposed in the country’s exploration licencing rounds before they end up sitting on more acreage they can realistically develop alone.
A similar situation with ONGC and OIL in the past prompted New Delhi to pressure each of the companies to do more with the underdevel- oped land they were holding. Mounting tension between ONGC and the government eventually led the state major to invite bids for production enhancement contracts (PECs) at 64 onshore fields in June 2019.
If foreign investors do not enter the upstream of their own accord then the government is going to have to bank on its companies forming joint ventures. The problem is that the blocks offered over the last two and half years have yet to show signs of a discovery large enough to attract a major new upstream investor. At the same time, the country’s older fields are bound by unfavour- able pricing policies. Until New Delhi can recon- cile its upstream policies the country’s oil and gas production will continue to disappoint.™
Week 09 04•March•2020 w w w . N E W S B A S E . c o m P5