India cannot afford to let lower natural gas price of $2.34 per mmBtu prevail as the rate will hinder development of a natural gas industry in the country, US-based Bernstein Research said in a latest report.
"Today, India has among the lowest prices of natural gas in Asia. This may suit consumers who are fortunate enough to have supply, but does not reflect the scarcity of natural gas resources," the investment research firm said in its report dated September 11.
In its report titled 'Blood Brothers - There Can Only Be One Answer', Bernstein talked of the gas dispute between the Ambani brothers wherein younger Anil's Reliance Natural
Resources Ltd is claiming gas from Mukesh's Reliance Industries at $2.34 per mmBtu, rates which are 44 per cent lower than the government price of $4.20 per mmBtu.
"Step aside Russia and Ukraine - this time it's serious! Its hard to recall a spat in the world of gas which has been as contentious and caught the public eye as much as the one between the Ambani brothers relating to the supply of gas from the giant Dhirubhai gas field in the KG basin," it said.
Endorsing RIL's KG-D6 field cost of $8.8 billion as "one of the lowest cost deepwater gas fields in the world", Bernstein said, "if the lower gas price of $2.34 per mmBtu is approved and applied to all gas produced from Dhirubhai, we estimate the full cycle IRR would be less than 3.3 per cent, which is below the cost of capital."
"The lower gas price (of $2.34 per mmBtu) calls into question the whole viability of the development of deepwater gas in India becuase of the precedent it sets," Bernstein said.
RIL's gas finding and development plus operating costs comes to "extremely competitive" $10 per barrel. "Does this mean RIL will make exorbitant profits? The answer is no."
It said the full-cycle IRR on Dhirubhai assuming a gas price of $4.2 per mmBtu, was close to 25 per cent. "By comparision with other provinces, this is at the lower end of what would be expected for a deep water development and certainly commensurate with the exploration risk and technical challenges of the project."
Bernstein said India has one of the lowest prices of natural gas in Asia. While state-run Oil and Natural Gas Corp (ONGC) sells gas at $2 per mmBtu, neighbouring China has doubled the rates to $4 per mmBtu in past 10 years.
"Rather than helping, low gas prices are hindering the development of a natural gas industry in India," it said.
"Given that deepwater gas supply would be the key to meeting domestic demand growth in India, any disruption to investment in the exploration and development of the KG basin will slow down the supply of natural gas and increase India's demand for expensive imported crude oil and LNG," it added.
