Reliance Industries Ltd, in partnership with BP Plc, has decided to adopt oil indexation for pricing the gas produced from India’s largest private-sector operated field in the KG basin. This move is aimed at capitalizing on the positive trend in the oil market. The companies have issued a tender, seeking bids from buyers for 4 million standard cubic meters per day of gas from the KG-D6 block in the Bay of Bengal, starting from December 1, 2023.
According to the tender document, Reliance and BP are looking for buyers to quote a price indexed to the Brent crude oil price. In previous auctions, the companies had sold gas indexed to the international gas benchmark, JKM. The tender document stated, “The consortium issued a notice inviting offers dated October 27, 2023, and invited offers from interested companies to offtake gas from the gas fields based on the price specified in the Request for Proposal (RFP), commencing from December 1, 2023, at the delivery point located in Gadimoga, Andhra Pradesh.”
Bidders have been asked to quote a premium (‘v’) they are willing to pay over and above 12.67% of the dated Brent crude oil price. The starting bid price for ‘v’ has been set at USD 1.08 per million British thermal units. Based on the current Brent crude oil price, this translates to a gas price of USD 11.8 per mmBtu (12.67% of USD 85 plus USD 1.08). However, the maximum bid value for ‘v’ is set at USD 4.5 per mmBtu, as mentioned in the tender.
It is important to note that the sale price will be the lower of the government-mandated maximum rate payable for gas from difficult fields or the price determined through the bidding process. The ceiling price payable for gas from difficult fields for a six-month period starting from October 1 is USD 9.96 per mmBtu. This means that even if Reliance and BP find buyers for 4 mmscmd of gas at USD 11.8 per mmBtu, the users will only have to pay USD 9.96 per mmBtu until March 31, 2024.
The government sets the ceiling price bi-annually for gas produced from difficult fields, such as deep-sea and high-pressure, high-temperature (HPHT) fields, effective from April 1 and October 1. The e-auction for 4 mmscmd of KG-D6 gas is scheduled for November 21, as mentioned in the tender document.
Natural gas is considered a cleaner-burning and efficient fuel, making it a transition fuel for countries looking to shift away from polluting hydrocarbons to zero-emission alternatives. In the previous auction in May, Indian Oil Corporation (IOC) secured half of the 5 mmscmd of gas offered by Reliance and BP. During that auction, users were asked to quote a variable (‘v’) over and above the JKM price, which is the spot market benchmark for liquefied natural gas (LNG) delivered to Japan and South Korea.
At the end of the e-auction, gas was sold to 16 buyers at a price of JKM plus USD 0.75 per mmBtu for a period of 3 years. With the prevailing JKM price at USD 9.2 per mmBtu, the price for KG-D6 gas amounted to around USD 10. In April 2023, Reliance and BP sold 6 mmscmd of gas, with the final bid price at a premium of USD 0.75 per mmBtu over the JKM price.
In the past, the companies had used the Dated Brent as the benchmark to sell KG-D6 gas before switching to JKM when international gas prices started to rise in 2021. Gas extracted from wells drilled below the seabed is utilized for electricity generation, fertilizer production, as CNG for automobiles, and for household cooking, among other industrial purposes. Reliance and BP together produce approximately 29-30 mmscmd of gas from three sets of gas fields in the KG-D6 block.
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