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Business News/ Companies / News/  RIL starts test production of CBM gas from 2 of its blocks in MP

RIL starts test production of CBM gas from 2 of its blocks in MP

Commercial production from the blocks will begin shortly at RIL's Sohagpur East and West blocks in Madhya Pradesh

RIL will be the third company to begin CBM gas production in the country. Photo: ReutersPremium
RIL will be the third company to begin CBM gas production in the country. Photo: Reuters

Reliance Industries Ltd (RIL) has started test production of coal bed methane (CBM) gas from two of its blocks, according to three people familiar with the development.

The blocks where test production has started include Sohagpur East and West, in Madhya Pradesh, they said. RIL was awarded the blocks in 2001 as part of the first round of CBM auctions.

Commercial production from the blocks will begin shortly, said one of the three people cited above, a company official who spoke on condition of anonymity.

“We have begun gas production from our CBM blocks, an announcement with regard to this would be made in our fourth quarter results," said the first person cited above. RIL will report its fourth quarter earnings on Friday.

RIL will be the third company to begin CBM gas production in the country. Great Eastern Energy Ltd (GEECL) and Essar Oil Ltd are the two existing firms selling CBM gas in the market.

Coal bed methane (CBM) is natural gas stored or absorbed in coal seams.

India, which had the world’s fourth largest proven coal reserves, holds significant potential for CBM exploration and production.

Reliance Gas Pipeline Ltd (RGPL) has laid around 312km of natural gas pipeline from Shahdol in Madhya Pradesh to Phulpur in Uttar Pradesh to transport gas from the CBM blocks.

RIL has completed the pipeline evacuation and testing, to be done before production, said the first person cited above.

The initial gas output from RIL’s blocks would be less than 1 million metric standard cubic metres of gas per day (mmscmd), said the person adding that the peak output is envisaged at 2.5-3 mmscmd in two years from production.

An RIL spokesperson declined to comment on the development.

“Beginning production from its CBM blocks is a positive move for RIL. Though the impact in terms of revenues would be seen in the coming quarters, it is a good move on the exploration and production front," said Kamlesh Kotak, head, equity research, at brokerage Asian Market Securities.

Pricing for the gas, however, is crucial.

RIL may have to sell the gas at the current price of $3.06 per million British thermal unit (mmBtu).

Gas prices were revised starting on 1 April to $3.06 per mmBtu compared with $4.24 per mmBtu in the period between October 2015 to March 2016. Amidst a fall in global prices, the government has reduced the cost of locally produced gas by about 20% for the six months period starting 1 April 2016 compared with previous six months period.

Currently, GEECL’s Raniganj (South), and Essar Oil’s Raniganj (East), both in West Bengal, are the only two CBM gas producing blocks in the country.

Essar Oil is selling CBM gas at $3.06 per mBtu, while GEECL is selling at $10.45 mBtu. While Essar Oil is producing 850 mmscmd of gas from its block, GEECL is producing 15.26 million standard cubic feet per day of gas. GEECL reports output in standard cubic feet as opposed to the standard cubic metres that Indian companies report in.

Explaining the rationale for GEECL’s higher pricing, an industry official said, “GEECL’s floor price was approved in 2008 which is valid for the life of the contract, i.e. 2036. CBM contracts are on revenue sharing model and not on cost recovery like other contracts. CBM contracts provides for arms length free market pricing. This is also in line with the new marginal field and hydrocarbon and exploration licensing policies announced by the government."

Gas pricing for CBM, however, could change going forward. Oil minister Dharmendra Pradhan had last December said the government is looking at a new pricing regime for CBM to help monetise the clean energy source.

“We have been informed that CBM pricing could undergo change and may be kept in line with gas pricing for marginal fields. That would be a big positive for CBM production in the country," said the CEO of a private energy company, requesting anonymity.

CBM producers have suggested that the price discovery mechanism, proposed under the marginal fields policy, should be made applicable to CBM contracts as well, since they are based on the revenue sharing contract model like the marginal fields.

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Published: 19 Apr 2016, 12:37 AM IST
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