The trio operating the once-prolific KG-D6 block would collectively defer their massive investment plans in the asset over the indecision on gas price revision, Canadian firm Niko Resources, partner of Reliance Industries and BP for the block, has confirmed.
“If the expected new price for natural gas sales from the D6 block in India is not notified by the government, then a significant portion of the contractor group’s planned investments in the block are expected to be deferred,” Niko said in its annual statement.
Although it was widely expected that any delay in implementing a new, remunerative gas price would foil investment plans of producers in the country including public sector ONGC, this is for the first time an operator is stating this on record.
Last week, the government decided to continue with the current gas price of $4.2 per million British thermal units (mmBtu) till September 30, before which it would hold extensive consultations on the issue of revising gas prices. The UPA government had in January 2014 notified new gas pricing guidelines as per the Rangarajan formula, the implementation of which would have hiked the price substantially from April 1, 2014. The implementation was later put in abeyance due to an Election Commission fiat.
Niko, which holds a 10% stake in KG-D6, said that the plan for R-cluster development project in the D6 block was approved by the government, providing the opportunity for significant production growth for the company in the future.
It, however, added: “The final decision to proceed with the project is pending resolution of the gas pricing issue.”
While the RIL-led consortium had planned to invest $4 billion this year in the R-series fields, the three-month delay will mean no orders will be placed immediately. Since the original pricing decision should have been taken six months ago, the new delay means almost a full year’s loss of production. ONGC chairman DK Sarraf had said earlier that a significant volume of gas could be extracted from its fields if the prices were remunerative.
Wendell R Robinson, chairman of Niko Resources, said, “In the opinion of the contractor group of the D6 Block, the government has contravened the terms of the D6 production sharing contract (PSC) and as a result, the contractor group filed an arbitration notice against the government seeking implementation of the guidelines in accordance with the terms and conditions of the PSC.”
According to Niko, the MJ field in the KG-D6 block remains a material discovery and is well positioned to take advantage of the existing block infrastructure. Niko and its partners are accelerating the commercial assessment of this significant discovery. The first well, MJ-A1, was completed in January, while MJ-A2 was completed in June. The results of the two appraisal wells are being integrated into the plans for further appraisal drilling and subsequent options for development.
The current production from KG-D6 hovers around 12.88 million standard cubic metres per day (mmscmd).
The RIL-BP combine, sources said, would be unable to evaluate future projects given the uncertainty over gas price revision and, as a result, might refrain from sanctioning planned investments of close to $4 billion this year for the R-series development to bring to production nearly 1.4 trillion cubic feet of discovered resources. Overall, the partners’ plan was to invest $8-10 billion in the next few years to significantly increase production from the KG-D6 block.
The Cabinet decision means production from the R-series project is delayed by a whole year. Theoretically, this would mean 15 mmscmd lower domestic production for the year. This represents $2 billion of LNG imports (Rs 12,000 crore) in the year that could have been avoided if the price hike was implemented three quarters earlier. For climatic reasons, drilling is normally done between October and February.
“If the expected new price for natural gas sales from the D6 block in India is not notified by the government, then a significant portion of the contractor group’s planned investments in the block are expected to be deferred,” Niko said in its annual statement.
Although it was widely expected that any delay in implementing a new, remunerative gas price would foil investment plans of producers in the country including public sector ONGC, this is for the first time an operator is stating this on record.
Last week, the government decided to continue with the current gas price of $4.2 per million British thermal units (mmBtu) till September 30, before which it would hold extensive consultations on the issue of revising gas prices. The UPA government had in January 2014 notified new gas pricing guidelines as per the Rangarajan formula, the implementation of which would have hiked the price substantially from April 1, 2014. The implementation was later put in abeyance due to an Election Commission fiat.
Niko, which holds a 10% stake in KG-D6, said that the plan for R-cluster development project in the D6 block was approved by the government, providing the opportunity for significant production growth for the company in the future.
It, however, added: “The final decision to proceed with the project is pending resolution of the gas pricing issue.”
While the RIL-led consortium had planned to invest $4 billion this year in the R-series fields, the three-month delay will mean no orders will be placed immediately. Since the original pricing decision should have been taken six months ago, the new delay means almost a full year’s loss of production. ONGC chairman DK Sarraf had said earlier that a significant volume of gas could be extracted from its fields if the prices were remunerative.
Wendell R Robinson, chairman of Niko Resources, said, “In the opinion of the contractor group of the D6 Block, the government has contravened the terms of the D6 production sharing contract (PSC) and as a result, the contractor group filed an arbitration notice against the government seeking implementation of the guidelines in accordance with the terms and conditions of the PSC.”
According to Niko, the MJ field in the KG-D6 block remains a material discovery and is well positioned to take advantage of the existing block infrastructure. Niko and its partners are accelerating the commercial assessment of this significant discovery. The first well, MJ-A1, was completed in January, while MJ-A2 was completed in June. The results of the two appraisal wells are being integrated into the plans for further appraisal drilling and subsequent options for development.
The current production from KG-D6 hovers around 12.88 million standard cubic metres per day (mmscmd).
The RIL-BP combine, sources said, would be unable to evaluate future projects given the uncertainty over gas price revision and, as a result, might refrain from sanctioning planned investments of close to $4 billion this year for the R-series development to bring to production nearly 1.4 trillion cubic feet of discovered resources. Overall, the partners’ plan was to invest $8-10 billion in the next few years to significantly increase production from the KG-D6 block.
The Cabinet decision means production from the R-series project is delayed by a whole year. Theoretically, this would mean 15 mmscmd lower domestic production for the year. This represents $2 billion of LNG imports (Rs 12,000 crore) in the year that could have been avoided if the price hike was implemented three quarters earlier. For climatic reasons, drilling is normally done between October and February.
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