While the increase in domestic natural gas price is being hotly debated, little is known or available on the actual cost of production, and whether there is any linkage between price and cost. The gas pricing formula of the government takes into account gas price in global hubs and the price of gas being imported into the country without any weightage to the cost of production.
Unlike the power sector where the cost of a unit of electricity can be clearly segregated into fixed and variable cost that includes fuel cost, petroleum sector pricing has global linkages which is why cost of producing oil and gas is not readily known. A questionnaire sent to Reliance Industries Ltd (RIL) seeking the private explorer's cost of production went unanswered.
The company has spent $14 billion overall in exploration and production with about $10 billion spent on KG-D6 while it has produced 2.2 trillion cubic feet of gas from D1 & D3 fields.
"RIL was to have produced 10 tcf gas at capital expenditure of $8 billion in addition to an annual operational cost of $50 million for 15 years. This would have made the cost of production of 1 tcf little less than $1 billion," explained a government official.
For Oil and Natural Gas Corporation (ONGC), the biggest hydrocarbon producer in the country, cost of producing one million British thermal unit of gas was $3.6-3.7 in 2012-13. Though these figures are undergoing auditing, a director on ONGC board told Business Standard it has risen from $3.59 in 2011-12.
"The increase would have been significantly higher with cost shooting to more than $4 but for the devaluation of rupee. Costs are derived in rupee."
ONGC along with RIL would benefit from the government-mandated Rangarajan formula that worked out a price of $6.7 at the end of June but would go up to $8.4 with the change in price of liquefied natural gas coming to India from Qatar next year.
It is estimated that RIL's cost of production would have been around $2.8-3 in the past and if the production was higher, the cost could have been lower than $2. However, new production would be at an average cost of production of $5-5.5.
Though RIL's KG-D6 block is a deepwater block with different geology and policy regime making a comparison with ONGC difficult, the government-owned company recorded a lower $3.6 per million British thermal unit cost in offshore production compared to $3.74 for onshore. In fact, the cost of production from offshore had marginally fallen compared to last year's $3.68 though in onshore it rose from $3.35 in 2011-12 to $3.74-3.75.
"Though offshore production cost is always more but onshore cost rose last year due to lower production," said the ONGC executive.
Gujarat-government owned Gujarat State Petroleum Corporation (GSPC) which is looking at producing gas from its Deendayal Upadhaya West discovery in the Krishna Godvari basin wanted to price its gas at $14.2. The company has so far incurred an investment in excess of Rs 7,000 crore towards exploration and development activity in the block.
Source- Business standard