August 31, 2007 / 6:29 AM / 10 years ago

Big money at stake as India weighs gas prices

5 Min Read

A Shell logo seen at a garage in Glasgow in this February 3, 2005 file photo. Global oil majors such as Exxon Mobil, Royal Dutch Shell and Chevron Corp are ready to pour billions of dollars into India's energy sector -- but only if the government stops meddling and allows private firms to sell gas at market prices.Jeff J Mitchell

MUMBAI (Reuters) - Global oil majors such as Exxon Mobil, Royal Dutch Shell and Chevron Corp are ready to pour billions of dollars into India's energy sector -- but only if the government stops meddling and allows private firms to sell gas at market prices.

New Delhi is set to approve a price formula for Reliance Industries Ltd's natural gas, according to local media, but any move to raise prices faces opposition from the politically influential power and fertiliser sectors, which consume three-quarters of the gas produced in India.

If Reliance wins this battle, the oil majors would be more willing to invest their money and know-how in oil and gas exploration in India, where politics and aggressive local players have previously kept them away.

Reliance, India's biggest private company, is spending $5.2 billion to develop two deep-sea gas fields in a block in the Krishna Godavari basin off the east coast, eyeing production of up to 80 million cubic metres per day by this time next year.

The Economic Times newspaper has said Reliance has set a base sale price for its gas of $4.33 per million British thermal units (mmBtu), excluding transmission and marketing charges -- almost double current levels that are controlled by government.

Gas demand in India, Asia's fast-growing, third-largest economy, runs at around 179 million cubic metres a day, but domestic gas availability is only around 95 million.

Firms say the right to sell oil and gas at market prices is in government contracts with exploration companies, and the government should not be interfering.

"Production sharing contracts in India are quite clear. If you find gas it's up to you to market it, and I don't think there's any piece of legislation that countervenes that," said Marc den Hartog, a director at Shell Gas & Power in India.

BG Group, which operates oil and gas fields in India, says rows over gas pricing could deter foreign investment.

"If you are looking to revisit production sharing contract clauses in the middle of this gas pricing controversy, it will dampen the interest of foreign companies," said Rajeev Khanna, a director at BG India.

Much at Stake

The decision on gas pricing will influence talks between Gujarat State Petroleum Corp and firms such as Exxon, BP Plc, BG and Total for the sale of a 20-30 percent stake in the state-run firm's gas field in the prolific Krishna Godavari basin.

"Our interest in Indian exploration has certainly been driven by the successes in the Krishna Godavari basin and the possible potential along other offshore areas, including the western margin," said Sanjeev Lowe, vice-president for BP India.

Royal Dutch Shell, which has explored in India in the past, also sees better prospects for drilling in India.

"The successes off the east coast changes the geologists' view and that's probably why you're seeing an increase in bidding for some of the acreage," said Shell's den Hartog.

In bidding for exploration blocks, foreign firms have long been outpriced by aggressive local groups such as Reliance and state-run Oil and Natural Gas Corp.

ONGC, which has not struck a big field for more than 20 years, has found three deep-water gas fields, one of which has proven reserves of 2.4 trillion cubic feet. But it needs help to make the most of these assets.

"We have the discoveries and know the volumes. These now have to be put into production optimally," ONGC's exploration director D.K. Pande said. "The only thing we don't have is technology."

And that's where the foreign companies smell an opportunity.

"Opting to partner in developing a proven resource rather than participating in highly competitive licensing rounds might also be a strategy employed by some of the majors," said Praveen Martis at global energy consultancy firm Wood Mackenzie.

ONGC is in talks with Chevron, Shell and Total about sharing ownership in its deep-water blocks and has already signed deals giving stakes to Brazil's Petrobras, Italy's ENI and Norway's Norsk Hydro. In return, it has stakes in blocks in Congo and Brazil.

Partly because of its poor exploration record, ONGC's shares have fallen 7 percent this year and trade at 9 times forecast earnings. Shares in Reliance, which also has operations in other industries, are up nearly 50 percent and trade at 22 times forecast earnings, according to Reuters data.

Reliance, which is developing its deep-sea fields itself, is also open to partnerships.

Chevron owns 5 percent of Reliance Petroleum, which is building a 580,000 barrels-per-day oil refinery next to parent Reliance Industries' unit in western India.

"As we move into ultra-deep waters we may look for such alliances to shares their experience and knowledge and also their technology, which we don't have," said P.M.S. Prasad, president and CEO of petroleum business at Reliance Industries.

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