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Oil ministry proposes pricing freedom for RIL, ONGC

The ministry has proposed to the cabinet that coal-bed methane gas producers be given pricing freedom and allowed to price the fuel at market rates


ONGC and Essar Oil too will benefit from the new policy as it will help them put their acreage into production quickly. Photo: Reuters
ONGC and Essar Oil too will benefit from the new policy as it will help them put their acreage into production quickly. Photo: Reuters

New Delhi: In a boost to firms like Reliance Industries Ltd and Oil and Natural Gas Corp. (ONGC), the oil ministry has moved a proposal to the cabinet for allowing pricing freedom for natural gas produced from coal seams.

The ministry has proposed to the cabinet that coal-bed methane (CBM) gas producers be given pricing freedom and allowed to price the fuel at market rates, sources privy to the development said. This will help operators quickly put in production the CBM blocks they hold and reverse the trend of investors relinquishing coal-seam blocks due to viability issues of current pricing.

Of the 33 CBM bearing blocks awarded so far in four auction rounds and on a nomination basis, gas is being produced from only four. The proposal put to the Cabinet is for allowing CBM operators to sell the gas at market rate determined through an arms-length process, they said, adding that operators are also proposed to be allowed marketing freedom.

The move will benefit Reliance Industries which has two blocks in Madhya Pradesh that are in the process of starting production. ONGC and Essar Oil too will benefit from the new policy as it will help them put their acreage into production quickly.

The four CBM blocks in production have a combined output of 1.17 million standard cubic metres per day. As many as 18 blocks have either been relinquished or are in the process as operators found that it did not make economic sense to produce gas at the prevailing rates. Most of the natural gas produced in the country is priced at an average of rates prevailing in gas surplus nations like the US, Russia and Canada.

The current price comes to $2.5 per million British thermal unit, a rate considered unviable by many operators. Sources said pricing freedom is enshrined in the CBM contracts. These contracts, they say, are based on fixed revenue that the government will get from sale of CBM gas, and higher the rate of gas, the higher the government revenue.

Unlike contracts for exploration and production of conventional natural gas, those of CBMs do not provide for cost recovery. According to the Directorate General of Hydrocarbons (DGH), India has the 5th largest proven coal reserves in the world and holds significant prospects for exploration and exploitation of CBM.

The estimated CBM resources in the country are about 92 trillion cubic feet. The 33 CBM blocks awarded so far hold a total of 62.4 tcf of the estimated CBM resource, of which, so far, 9.9 Tcf has been established as Gas in Place (GIP).

The sources said the CBM gas pricing policy proposed to the Cabinet is in line with the recently unveiled regime governing small and marginal oil and natural gas blocks. The government had recently auctioned small and marginal discovered oil and gas fields by promising investors complete pricing, marketing and production freedom under a revenue sharing contract agreement.

Pricing freedom would help quickly ramp up CBM gas production to targeted 5.77 mmscmd within a year, they said.

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