The KG-D6 block in the country’s East Coast may not see further investments till there is clarity from the Government on gas pricing, even if the mandatory budget approvals for the block are given.
At the current price of $4.2/million British thermal unit (mmBtu) (at landfall point), planned investments that run into billions are unviable, say those connected with the development of the block.
The contractors – Reliance Industries Ltd (operator), BP, and Niko Resources – under the KG-D6 block enhancement plan are looking to invest over $5 billion in the next three to five years in a series of projects to develop around 4 trillion cubic feet (tcf) of discovered natural gas resources in the block.
For the investment to become viable, the contractors are seeking a market price (over $10/mmBtu) for D6 gas, which is up for review by the Empowered Group of Ministers (EGoM).
The new price for D6 is to be applicable from April next year. The Board of Reliance Industries is cautious about investment proposals being made by the Exploration & Production Group.
Reliance has been chalking out its next phase of capital investments in the refining, petrochemicals, and retail and broadband services.
Capital projects
It was also becoming hard to convince lenders to fund projects where returns on investment were tight, sources said.
RIL and its partners have been facing criticism for not being able to check the decline in output from largest producing fields in the block, which is now at 15 million standard cubic metres a day (mmscmd).
The planned capital projects in the block are: measures to check geological damages in D1 and D3 fields, an additional gas production well and compressor modification in MA field, R-Series field development plan costing about $3.5 billion, Satellite area development, and other satellite area – pre-development costs.
Meanwhile, the EGoM looking into the issue of gas pricing and allocation is expected to meet soon to consider the Rangarajan Committee’s report on the issue.
Though the formula suggested by the Committee would result in doubling the gas price, the Finance, Power and Fertiliser Ministries as well as gas producers have expressed their reservations on the issue.
In fact, Cairn India and Gujarat State Petroleum Corporation (GSPC) are seeking a price of over $8.5/mBtu.
Transition period
BP had reportedly written to the Prime Minister suggesting that a transition toward the arm’s-length market-determined pricing system to the level of imported gas (LNG) price could take place over a three-year period.
For the transition period, it had suggested an additional price incentive of $1.5/mmBtu to meet the high costs and exploration risks in deep-water developments.