ONGC takes a page out of Reliance’s book, navigating a subsidiary to buy its own gas

Taking a page out of Reliance Industries Ltd’s playbook, the state-owned Oil and Natural Gas Corporation (ONGC) is creating a new subsidiary for a gas industry that could be used to import and supply gas. purchase from the company’s own domains.

The board of ONGC agreed at their meeting on 13 February that a new subsidiary would be created for the gas and liquefied natural gas (LNG) industrial value chain subject to mandatory approval, according to a third-quarter employment statement. company.

“The company is formed with the aim of sourcing, marketing and trading natural gas, LNG industry, Hydrogen rich CNG (HCNG), gas to power industry, bioenergy / bio-energy industry. gas / biomethane / other biofuel industry, etc. , “he said.

ONGC can use the new subsidiary to purchase any new gas the company buys from fields such as KG-D5 in the Krishna Godavari basin, people with direct experience of the issue said.

The government in October 2020 allowed gas producer affiliates to buy the fuel at an open auction.

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This policy change allowed Reliance to buy two-thirds of the average 7.5 million cubic meters per day of gas it plans to extract this year from the new fields in the KG-D6 block with UK partner plc BP.

“ONGC can also look at this option now. The new subgroup can participate in any auction performed by ONGC for augmentation gas from the KG-D5 block,” a source said.

In addition to ensuring competition and finding fair prices, the ONGC subsidiary can sell the gas as large as companies such as Mangalore Refinery and Petrochemicals Ltd (MRPL) at the margin.

This would help ONGC gain better margins on the gas produced.

“Gas is currently a loss-making industry for ONGC. The government controls the price of gas below the cost of production,” the source said. The government has set a price of $ 1.79 per million British thermal units for ONGC fields. This is half the cost of production.

It allows a higher rate of $ 4.06 per mmBtu for difficult areas such as deepsea fields (KG-D6 and KG-D6) but even that is lower than the cost of production from full capital projects.

The current rule means that even if Reliance found an equivalent price of $ 6-7 per mmBtu for the 7.5 mmscmd of fresh gas from KG-D6, it would only get $ 4.06 until March 31st.

The same would be true for ONGC. It may find a higher rate for the planned 15 mmscmd boost gas from the KG-D5 block but will only get $ 4.06 at the current price.

“So, basically an ONGC gas subsidiary can bid and buy KG-D5 gas. It will pay ONGC $ 4.06 per mmBtu but it can sell to MRPL or any other buyer at a higher price than that, making ensuring that the gas industry becomes a viable proposition, “the source said.

The government has given operators freedom to find market prices but this rate is subject to a price cap or cap that the government notifies them every six months. The cap for six months to March 31, 2021 is $ 4.06 per mmBtu.

At the February 5 auction, Reliance O2C Limited, affiliated with Reliance Industries Ltd, raised 4.8 mmscmd of the 7.5 mmscmd gas sold.

GAIL (India) State Gas Facility Limited acquired 0.85 mmscmd of supplies while Shell acquired 0.7 mmscmd.

Adani Total Gas Ltd acquired 0.1 mmscmd, Hindustan Petroleum Corporation Ltd (HPCL) 0.2 mmscmd and Torrest Gas 0.02 mmscmd. Other customers included IRM Energy (0.1 mmscmd), PIL (0.35 mmscmd) and IGS (0.35 mmscmd), they said.

Sources reported that the gas was purchased at a price of $ 0.18 per million British thermal unit discount to JKM (Japan / Korea natural gas import price), i.e. JKM (minus) $ 0.18 price with holdings ranging from 3 to 5 years.

Reliance O2C is the new unit that owns the company’s refrigeration 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 a 2 to 6 year tenure. That gas went to buyers like Essar Steel, Adani Group and GAIL with the state.

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Reliance-BP started gas production on December 18 last year from the R Cluster freshwater gas field in the KG-D6 block off the east coast of India.

The duo is developing three deep water gas projects in the KG-D6 block – R Cluster, Satellites Cluster and MJ – which are expected to meet around 15 per cent of India’s gas demand by 2023.

ONGC is developing a set of detections in the KG-D5 block adjacent to Reliance’s D6 area.

ONGC fields, which started production last year at a limited rate of 1 mmscmd, are estimated to have maximum yields of 16 mmsmd of natural gas and 80,000 barrels per day of oil.