RIL wins right to buy own CBM output
Wednesday, Oct 04, 2017
Privately owned Reliance Industries Ltd (RIL) has outbid its rivals to buy the entire volume of coal-bed methane (CBM) produced from its own Sohagpur East and Sohagpur West blocks in Madhya Pradesh State until March 2021.

In the latest bidding process for up to 3 mcm per day of gas produced between October 2017 and March 2021, RIL offered to pay US$6.26 per mmBtu (US$173.15 per 1,000 cubic metres) at the current oil price.

Piramal Glass was the second highest bidder, followed by Gujarat State Petroleum Corp. (GPSC). Gas utility GAIL (India) and its subsidiary GAIL Gas also failed in their attempts to procure the CBM. RIL intends to use the gas at its petrochemical plants in Gujarat and Maharashtra, which run mainly on expensive imported fuel.

This is the third time this year that RIL has outbid rivals in a bidding process conducted by an independent agency to procure the gas from both Sohagpur blocks.

RIL began commercial gas production from Sohagpur in March. Planned output in October is 800,000 cubic metres per day and RIL is aiming to raise this to 2 mcm per day by March 2018. Peak production of 3 mcm per day is expected in the third quarter of 2018.

RIL has already invested about US$500 million in CBM development and in laying a 300-km pipeline from Sohagpur to Phulpur in Uttar Pradesh in order to connect to the national gas grid. The seuccessful and transparent open market bids for the Sohagpur CBM are expected to send the right message to investors and producers given the long period of uncertainty linked to pricing of the unconventional resource in India.

In a long-awaited move in April, the Indian Ministry of Petroleum and Natural Gas said producers needed to call for open bids for the sale of CBM and seek quotes to establish the market price.

This marked a move away from the government-mandated formula linking conventional gas output in India to an average of prices quoted in global hubs in the UK, US, Canada and Russia. This approach has been criticised because it does not reflect the cost of producing CBM as well as the market realities in India, which imports LNG owing to the insufficient availability of domestic gas.

Unsurprisingly, the selling price of Sohagpur CBM is substantially higher than the official US$2.48 per mmBtu (US$68.60 per 1,000 cubic metres) price for conventional gas produced by firms such as RIL and Oil and Natural Gas Corp. (ONGC) in April-September. The high price will be an incentive for CBM players such as Great Eastern Energy Corporation Ltd. (GEECL), ONGC and Essar Oil to move ahead with investment plans mostly focused on Jharkhand and West Bengal.

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