ONGC seeks premium pricing for KG gas block

Oil and Natural Gas Corporation (ONGC) has sought premium gas pricing for an undeveloped deep-sea block in the Krishna-Godavari basin, where it plans to invest $6 billion, as top executives are anxious about the viability of the project at the current oil and gas prices.

According to an Economic Times report, the state-run explorer has written to the government that the output from the KGDWN-98/2 field off the eastern coast be given a premium over the domestic price which was too low to make the project workable.

Several global oil companies have sharply cut capital expenditure this year as crude oil prices have halved, while LNG prices in Asia have tumbled to $6.8 per unit from a peak of $17 in April last year. The drop in drilling has reduced costs of field development, but not enough to make many projects viable.

ONGC, being a state-run firm, is caught in an unenviable situation with the government pressing it to raise production and falling prices acting as a disincentive.

Another apprehension top executives have is possible criticism if things went wrong. "Fingers can be pointed in the future on how the board allowed the company to invest billions of dollars in a project which was so apparently unviable."

The KG-DWN-98/2 field is located close to the Reliance Industries' KG-D6 block. It has reserves of both oil and gas, and is expected to start producing oil by early 2019 and gas six months later. The much delayed project is important for the country seeking to cut its crude oil import by 10 per cent in seven years from nearly 80 per cent now.

Last October, the government had announced a price formula for most gas produced in the country and promised to offer a premium to output from the difficult deep-water projects. The premium, not yet announced, is to be available only to discoveries made after last October, thereby excluding projects like ONGC's KG-DWN-98/2 and Reliance-BP's KG-D6.

In a letter to the government, ONGC has sought a premium for discoveries made before October last year but not developed so far. This would exclude Reliance's producing fields but would give the company a higher price for new discoveries that have not been developed so far.

Private players have been demanding the premium for all discoveries in the deep-water irrespective of the time of discovery.

The domestic gas price formula is linked to international prices and halving of global crude oil and gas prices in a year has slashed local gas prices by a quarter since November to $3.82 a unit.

The global spot rates for natural gas are about $7. At this price, ONGC has increasingly begun to believe that the investment in the project may not be rewarding.