Kg Gas Pricing: An Insight

By Author: Mike Smith
Total Articles: 103
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Is $4.2 per mmbtu a realistic price? Where does it stand in the market?

In view of this, it becomes pertinent to investigate where the gas price of $4.2 per mmbtu stands in Indian and global market. KG D-6 gas price is for long-term and does not get impacted significantly due to market forces.

Price of $4.2 per mmbtu cheaper than nearly all the domestic gas prices except for APM gas:

For a fair assessment, the price of $4.2 per mmbtu needs to be compared with prices of domestic gas from various fields. In the country, price of gas is lowest at $1.8 per mmbtu for APM fields operated by state-run ONGC and OIL. Lately, ONGC and OIL has demanded the APM gas prices to be raised to $4.2 per mmbtu.

However, media report indicates that Government has agreed to a price hike of 44% or $2.6 per mmbtu. The second lowest gas price of $3.5 per mmbtu is for Ravva field operated by Cairn, which is up for revision from December, 2008. Bearing in mind the demand of gas in the country and market trend, revised gas price for Ravva field would not be less than $5 per mmbtu, higher than KG D6 price.

Gas price ...
... for another Cairn operated field Ravva Satellite is already higher than KG D6 gas at $4.5 per mmbtu and is set for review along with Ravva. If media reports are to be believed, GAIL, the marketer of Ravva Satellite gas, had offered the price of $5.73 per mmbtu as soon as the price became due for revision, only to be rejected by the operator. Latest media reports suggest that Cairn has demanded the price of $6.75 per mmbtu from GAIL based on the price offered from an industrial unit. The demanded price is over 60% higher compared to KG D6 price.

Henry Hub gas price ranged between $5-8 per mmbtu during last five years, which is considerably above the $4.2 per mmbtu price:

Globally, gas prices at Henry Hub in Louisiana are considered as the benchmark. Price trend for past five years (from 2004 to 2009) at Henry Hub indicates that gas prices have broadly ranged between $5 per mmbtu to $8 per mmbtu during 2004-09. Gas prices shot up sharply above $13 per mmbtu in 2005 but eventually settled in the range of $5-8 per mmbtu. Gas prices at Henry Hub again surged to nearly $15 per mmbtu in 2008 on account of spiraling oil prices and huge gas demand, but crashed below $5 per mmbtu in 2009 due to unprecedented recession in US market that resulted in gas prices declining well below $5 per mmbtu. As the US was in recession and anticipated to come out of the same, the energy demand ultimately will also find the lost northward trend. The will in due course bring the gas prices back to the range $5-8 per mmbtu. Compared to the Henry Hub price range of $5-8 per mmbtu, KG D6 price of $4.2 per mmbtu for five years seems very competitive and indeed substantially lower. Hence, the $4.2 per mmbtu gas price stands relevant even by global standards.

All alternative fuel prices multiple times higher than that of $4.2 per mmbtu barring domestic coal:

Prices of four major petroleum products namely Petrol, Diesel, Kerosene and Domestic LPG is regulated by the Government and changed in larger public interest. Retail price of Rs. 48.76 per litre of Petrol in Mumbai (Rs. 4.69 per litre cheaper than the actual price) corresponds to $23.27 per mmbtu considering the calorific value of Petrol at 11,000 kcal per litre.

Addition of Rs. 4.69 per litre subsidy provided by the Government increases it to $25.51 per litre. Similarly, diesel price of Rs. 36.7 per litre (Rs. 3.09 cheaper than the actual price) with calorific value of 9800 kcal per litre translates to $19.66 per mmbtu. If the subsidy of Rs. 3.09 per litre is added into this, the price in energy terms increases to $21.32 per mmbtu.

Prices of all these petroleum products, with or without Government subsidies, are beyond the KG D6 gas price of $4.2 per mmbtu. Nearest among all, is the subsidized price of Kerosene at $4.98 per mmbtu which is well over $4.2 per mmbtu price. Exclusion of subsidy from the Kerosene price makes it over three times than that of KG D6 gas price.

KG D-6 Gas - Most Realistic and Competitive fuel price in the market:

Finally, the gas price of $4.2 per mmbtu appear not only highly competitive and comparable to domestic gas prices and RLNG, but also lower than average price of gas in international market. The price is also considerably lower than other substitute fuels in the domestic market. Undoubtedly, the Empowered Group of Ministers seems to have worked thoroughly to make the KG D6 price realistic and acceptable. Therefore, the seeds of doubts being raised by Anil Ambani company about the KG D6 gas price appear irrelevant and have grown from personal animosity.

Oil & Gas from the KG - D6 project of Reliance, the largest discovery in recent times and another feather in the cap for Mukesh Ambani controlled Reliance Industries which is India's largest and most successful private sector conglomerate marred only by the Reliance Gas Dispute. RIL, however, has proven these accusations erroneous time and again.