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KG basin gas on the horizon - Views on News from Equitymaster

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KG basin gas on the horizon

Mar 30, 2009

The much awaited production of KG basin gas is finally on the horizon. As per a leading business daily, Reliance Industries (RIL) has signed contracts with 12 fertiliser firms for the sale of its first stream of natural gas from its D6 block in the Krishna Godavari basin. The company will sell around 15 m standard cubic meters of gas per day (mscmd) to these firms from mid April at US$ 4.2 per m British thermal units (mbtu). In addition, these companies will pay a transportation margin to RIL, Gail or Gujarat State Petronet. Hence, the actual delivered price will range from US$ 5.34 per mbtu in Andhra Pradesh to US$ 6.21 in Uttar Pradesh.

Company wise break-up
Company mscmd
Indian Farmers Fertiliser Cooperative 3.57
Rashtriya Chemicals and Fertilizers 3.05
Krishak Bharati Co-operative 2.35
Nagarjuna Fertilizers 1.55
Chambal Fertilisers 1.15
Tata Chemicals 0.88
Gujarat State Fertilizers and Chemicals 0.72
National Fertiliser 0.65
Shriram 0.62
Indo Gulf 0.48
Gujarat Narmada Valley Fertilizers 0.34
Total 15.36
Source: Economic Times

Fertiliser companies have received a priority allocation because of the gas utilisation policy. Other users like gas based power plants and city gas distribution will receive a share from the subsequent streams from the D6 block. The production is set to increase to 40 mscmd during the year and eventually to 80 mscmd. It may be noted that production was supposed to commence last year but got delayed due to the litigation from RNRL and NTPC. Given that India still imports more than 70% of its hydrocarbon requirement, domestic production is a matter of enormous significance.

M&A in global oil companies set to rise
The last time the price of oil plummeted in the late 1990s, oil companies found it better to spend money on existing production instead of exploring for new sources of production. As per the Economist, Suncor and Petro-Canada, two large Canadian oil firms, have begun an US$ 16 bn merger. These companies focus on Canadian tar sands and expect cost savings from avoiding duplication in capital expenditure in processing and transportation infrastructure.

Others are likely to follow suit, especially in the unconventional sources, where smaller firms do not have the money to execute the entire production process. One such source is coal bed methane, i.e. extracting natural gas from coal deposits. BG, a British gas firm, has made investments in a few companies in the space. BG has a presence in India through Gujarat Gas. It may be noted that India has a lot of potential in the coal bed methane space due to the abundance of coal deposits.


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