Gas pricing: The CBM conundrum

Gas pricing: The CBM conundrum

Last Updated: Sun, Jul 14, 2013 08:21 hrs
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The government's recent approval of a hike in domestic natural gas prices from next April next year has thrown up the conundrum of coal bed methane (CBM) gas in the country.

According to India's most successful producer of this gas derived from coal seams, the government's clubbing all natural gas together for pricing is aimed at applying controls on an industry that is already charging market prices allowed by government contracts.

"By saying that the new gas pricing policy applies to all gas, the government is trying to control the CBM industry, whereas as per our contracts we are already charging market determined, that is arm's length, price," Yogendra Modi, chairman and CEO, Great Eastern Energy Corp Ltd (GEECL) told IANS in an interview.

GEECL currently produces around 20 million standard cubic feet (mmcsfd) of gas a day with 144 wells drilled on its Raniganj (South) block in West Bengal.

A cabinet panel had June 27 approved a new gas pricing policy that will come into effect from April 2014. It approved pricing of domestically produced gas at an average of the cost of LNG imported into India and international hub, or market, rates - a formula suggested by the C. Rangarajan Committee constituted by Prime Minister Manmohan Singh to look into issues concerning the oil and gas sector.

"We have represented to the Rangarajan Committee that the sanctity of our contracts, which are revenue sharing without allowing recovery of costs from the government, should be respected. The changes can only apply in future to new contracts following a future round of bidding," Modi said.

The Rangarajan panel has proposed doing away with the existing production-sharing formula for hydrocarbons, and replacing it with the sharing of revenue between the contractor and the government.

The oil ministry has announced that applying the Rangarajan formula to the price for gas for the April-June quarter of this fiscal comes to $6.83 per million British thermal unit (mmBtu).

Modi said GEECL was the only CBM company to have a price for gas approved by the government since 2008 at $6.69 mmBtu. With charges for compression, distribution and marketing added, GEECL sells CBM gas to customers at around $12 mmBtu.

"With the revenue-sharing model, the interests of the government and CBM producers coincide perfectly because the higher price we sell, the more is the government's royalty share. Under the contract with GEECL, the government is assured of a royalty at $6.69, even if I end up selling at a lower price," Modi said.

In response to a query on the issue, Petroleum Minister M. Veerappa Moily told IANS that the recent government decision to hike gas prices would also apply to CBM.

According to Modi, the government attempt to bring in controls also in terms of an obligation to sell at a fixed low price to specific consumers like power and fertilizer industries would result in holding back the growth of domestic gas output.

He pointed to the huge infrastructure costs of laying pipelines that companies have to fund themselves as India's CBM fields are too small to interest big corporations.

"Most CBM sources are in the country's eastern region, where there are no pipelines," Modi said.

According to the Directorate General of Hydrocarbons, CBM resources in 26 blocks awarded through bidding are estimated at 49 trillion cubic feet, with a output potential of some 1.34 billion cubic feet of gas a day.

The London-listed GEECL, whose production far outstrips the other major players in field like Essar, Reliance Industries and ONGC, sells to mostly small and medium enterprises in West Bengal. Many such enterprises have converted their generators from heavy fuel oil to natural gas.

"Some industry is even being set up in West Bengal specifically to take advantage of our gas," Modi signed off.

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