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Holes in comparison with Bangla

Mumbai, Feb. 12: Comparisons are usually odious.

On Wednesday, Arvind Kejriwal stirred a hornet’s nest by saying that if Reliance Industries’ partner in the KG-D6 block — Niko Resources of Canada — could sell natural gas to the Bangladesh government at $2.34 per million British thermal unit (mBtu) from a field close to Dhaka, why was Reliance Industries clamouring for a gas price of close to $8.40 from April 1 for the gas it produces from the Krishna-Godavari basin?

The British thermal unit is a traditional unit of energy equal to about 1055 joules. It is the amount of energy needed to cool or heat one pound of water by one degree Fahrenheit. In the case of natural gas, it is a measure of the heating efficiency of the gas.

Some analysts have now started to pick holes in Kejriwal’s oversimplified comparison of apples and pears.

Oil industry veterans say Kejriwal is deliberately choosing to ignore the difference in capital expenditure involved between an unexplored, deep-water gasfield in India and a fully discovered onshore gas field in Bangladesh.

The gas field in Bangladesh is the Bangora field which covers 1,770 square kilometres surrounding the Bangladesh capital. Natural gas and condensate production began at Bangora on May 2006 — almost three years before the KG-D6 field started commercial production.

“Kejriwal is probably unaware that when Niko started operating the block in Bangladesh, the gas was already discovered there. Moreover, a crucial fact is that the particular block (Bangladesh) is on land, unlike the deep water KG-D6. There is a huge difference in exploring or producing gas on land and in a deep-water block where the process can be very challenging,” said an industry analyst who did not wish to be identified.

A complex deep-water exploration like KG-D6 — which is the first of its kind to start commercial production in the sub-continent — presents unique challenges that an onshore field cannot match. For starters, the environment is harsh especially when operating at a water depth of more than 2 kilometres. It is compounded by the fact that the underwater geological terrain and faults pose their own challenges. Soil erosion is a huge problem that could affect the stability of equipment at the seabed apart from leading to corrosion of the equipment.

Moreover, the cost of hiring a deep-water rig is very high with per day costs ranging between $200,000 and $500,000. Reliance is utilising two drillships in the field at the present. The KG-D6 oil and gas fields are located at water depths ranging from 600 meters and extending up to 2,000 metres. This is much beyond the range of human diver depths, which can at best go up to 100 metres.

Source added that Reliance also encountered the challenge of equipment installation because of rough ocean and weather conditions of the Bay of Bengal, which is one of the harshest operating environments in the world.

While such challenges and the discovery of gas in a deep-water block required sophisticated equipment like best in class deep-water rigs, thereby necessitating higher capital expenditure than onshore, the price of $2.34 per mBtu or even the earlier price of $4.20 per mBtu would have been unviable not only for Reliance, but also others engaged in producing gas from the Krishna-Godavari basin.

A similar view was echoed by former chairman of Oil and Natural Gas Corporation (ONGC) R.S. Sharma who said the price of $4.20 per mBtu was economically unviable to produce gas in the KG basin. ONGC has a field that adjoins the one operated by Reliance Industries. ONGC and Gujarat State Petroleum Corp (GSPC) have blocks that have yet to start production at the Krishna-Godavari basin.

“The considered opinion across our industry is that the earlier price of $4.20 per mBtu is not attractive to bring in greater foreign investments. Of course, buyers of gas may have a different opinion,” the official added.

There are two features in the Bangladesh project: unlike in KG-D6, Petrobangla, the state-owned utility, has a 10 per cent stake in the venture. Petrobangla is also the sole purchaser of the natural gas production from the field. So, it had a vested interest in keeping the purchase price low.

Finally, the Bangladesh government has granted a tax holiday to Niko Resources — a benefit that the Indian government doesn’t provide to investors here.