Free gas pricing policy won't help 15-17 Tcf gas discoveries

New Delhi: Government move to free natural gas pricing will not resolve the issue of economically developing already discovered 15-17 trillion cubic feet of gas reserves as the policy will only apply to future finds.

Industry officials said the Oil Ministry's proposal to make natural gas prices market driven for blocks or areas awarded in future exploration licensing rounds/auctions is a forward looking policy framework.

It "promotes key principles of 'ease of doing business' and 'minimum government maximum governance'," a senior executive at a multinational energy firm said.

Pricing and marketing freedom will help develop and manage a vibrant oil and gas market, said another executive at a leading private explorer. "Its a very big step forward."

However, it does not resolve the issue of economically developing the already discovered 15-17 Tcf of natural gas, which can yield an additional 100 million standard cubic meters per day by 2022 to help reduce import dependency, the executive said.

The existing capped natural gas price of USD 4.24 per million British thermal unit is not enough to support multi-billion dollar investment for developing the gas finds, most of which are in deepsea and difficult areas.

Market rates are nearly double of the current price.

"Allowing a pricing policy that support developing these finds. It will also brings much needed revenue (USD 30-40 billion), investment (USD 50-60 billion), skills and employment (100,000 during construction)," the executive said.

Several discoveries of Reliance Industries-BP combine, state-owned Oil and Natural Gas Corp (ONGC) and Gujarat State Petroleum Corp (GSPC) in Bay of Bengal are economically unviable to produce at current gas price.

Finding current rates too low to support exploration and production cost, the Oil Ministry on November 6 proposed to free natural gas pricing, bring in open acreage licensing and replace the controversial Production Sharing Contract (PSC) with simpler revenue-sharing regime for all future field auctions.

In September, the government had allowed pricing freedom for the gas produced from 69 small and marginal fields it plans to auction shortly.

"In the recently announced marginal field policy, the government has provided pricing and marketing freedom for the natural gas. On similar lines, it is proposed to provide pricing and marketing freedom for the natural gas to be produced from the areas to be awarded under the new contractual and fiscal regime in order to incentivise production from these areas," the Ministry said inviting comments on a new policy.

"Economic development of existing discoveries in difficult environment need similar market and price freedom to meet Prime Minister's goal of reducing import dependency by 10 per cent," an executive said.

The ministry proposed a Uniform Licensing Policy that will allow exploitation of all forms of hydrocarbons - conventional oil and gas as well as unconventional shale oil and gas and coal-bed methane (CBM) under one permit.

Industry officials said uniform licensing to provide flexibility while the open acreage framework that allows operators to pick blocks or areas for exploration rather than government selecting them, will encourage round the clock licensing.

At present, conventional oil and gas exploration is covered by the New Exploration Licensing Policy (NELP) while CBM exploration and production is governed by a separate regime. There is no licensing regime for shale oil and gas.

Benefits from these policies will be accrued in the long term given the exploration and production cycle, the official said.

The ministry has proposed to replace the present fiscal system of production sharing based on Pre-Tax Investment Multiple (PTIM) and cost recovery /production linked payment with a revenue sharing model.

The new model will replace the current practice of companies getting blocks by bidding the maximum work programme and then recovering all of their investment before sharing profits with the government. This model was criticised by CAG, which said it encouraged companies to keep raising cost so as to postpone higher share of profits to the government.

In the new regime, the companies will have to indicate the quantity of oil and gas they will share with the government at different stages of production as well as at different rates.

This will protect government interest and minimise scrutiny and delays.