India Makes CBM Progress

So far the Indian government has awarded 33 CBM blocks under four bidding rounds, though two blocks have been relinquished by ONGC.

Total sedimentary area for CBM exploration is estimated 26,000 square kilometers with expected production potential of 38 million standard cubic metres per day (mscmd).

India’s present CBM output stands over 200,000 scmd, while the projected CBM gas production by 2013 is estimated at 7.5 mscmd as more players become active in the field.

With significant domestic demand supply gap, the government is looking at prospects of 10% of India’s gas output from local CBM sources in the next 3-5 years, to reduce reliance on expensive imported LNG that cost USS$15 per unit and a drain on the country’s foreign exchange reserves.

As per the latest official estimates, India’s gas demand will grow from nearly 300 mscmd in 2012-13 to about 475 mscmd by 2016-17.

Investing CBM

The present output of LSE’s AIM-listed Great Eastern Energy Corporation (GEECL), the first commercial producer of CBM in India, stands 160,000 scmd and slated to rise to 3 mscmd over the next 3-4 years at its Raniganj block (in West Bengal).

Investors are encouraged that the CBM gas produced by GEECL is being sold at nearly 70 % premium over the price of Reliance Industries Limited (RIL) KG-D6 gas at $4.2 per unit.

GEECL is promoted by father son duo Yogendra K. Modi and Prashant Modi. The company sells methane to industrial consumers in the Asansol-Durgapur region in West Bengal.

Following production success in West Bengal, the company is looking to broaden its CBM base to southern state Tamil Nadu.

Meawnhile, Essar Oil, part of the US$15 billion Essar Group, has also commenced supply of about 33,000 scmd CBM under test conditions from Raniganj, making it the second company in India to do so after GEECL. The company plans to raise output here to 3.5 mscmd in three years.

With five exploration blocks, Essar is the biggest firm exploring CBM in India. The other four blocks awarded to it in 2010 have prospective resources of 7.6 trillion cubic feet of CBM gas, according to the company.

Given its developed expertise the company is also looking at acquiring CBM blocks overseas, with Indonesia and Australia being particular focus.

Private sector major RIL is also investing heavily on exploration and production of CBM, especially in Madhya Pradesh. Its Suhagpur blocks are expected to achieve peak production of 4.5 mmscmd in 2014-15. RIL holds 3.6 trillion cubic feet of gas in its CBM blocks, as per the official estimates.

Other CBM investors in India include OIL, ONGC, Australia’s Arrow Energy, Tata Power, Shiv Vani and Reliance Power.

CBM Paradigm

With CBM output slated to rise, India’s oil ministry issued guidelines earlier this year for companies to adhere to remove ad hoc pricing decisions and disputes leading to legal issues. For CBM supplies, the priority sectors comprise fertilizer, bottling plants of liquefied petroleum gas and power companies, in that order.

The oil ministry’s note followed GEECL unhappiness about the government's decision to allow Essar Oil to sell CBM gas at a provisional price of US$5.25 per unit (excluding $1 per unit transport cost), lower than the price approved for GEECL at $6.79 per unit.

The company said the price disparity ``may seriously dent its growth plans’’ as both Essar and GEECL are producing the CBM under similar conditions.

If GEECL is forced to cut its price as supplies rise to take on competition, it will impact its investment decisions based on higher returns. RIL, meanwhile, reportedly is seeking approval $13 per unit for its CBM output.

In many ways, the CBM norms underline the overriding role of the government in deciding the price of CBM sold and the priority allocation to sectors which duplicates New Delhi’s natural gas utilization policy of 2007.

However, with the federal government unlikely to loosen its say in the way the country’s natural resources, including oil and natural gas are managed, Indian and overseas firm have no choice but to work within the existing paradigms.

Yet, there has been progress on the CBM front. Unfortunately such has not been the case for shale gas, though Indian firms such as RIL and GAIL are investing in shale acreages in North America.

Last month, India postponed its plans to announce a shale gas exploration policy to next year, a move that is perhaps related to insufficient ground data to begin an auction process.

There is also a bit of uncertainty about the environment impact of shale gas production via the process termed as ``fracking.’’