According to tender documents, the state-owned Oil and Natural Gas Corporation has agreed to waive the marketing margin on gas it expects, to generate from its KG basin area, but has declined to lower the minimum cost. Last month, ONGC, India’s largest oil and gas company sought bids for the initial sale of 2 million standard cubic metres of gas per day from its KG-DWN-98/2 block (KG-D5). Bidders were asked to submit a rate that was based on current Brent crude oil prices. It set the floor rate at 10.5 percent of the three-month average Brent crude oil price as the minimum rate. Additionally, the company requested USD 0.20 per million British thermal unit. Potential bidders, on the other hand were against both, the marketing margin and the “big” floor price.
In response to bidders’ questions, ONGC stated that the floor price could not be increased, but that the marketing margin would be reduced. “No agreement has been reached on a change in the reserve gas price (floor rate). However, in response to bidder demands, the marketing margin of USD 0.20 per mmBtu over and above the contract price has been eliminated“, it said. The minimum price is USD 7.3 per million British thermal units at the current Brent crude oil price of close to USD 70. This price, however will be subject to the government’s deep-sea field ceiling or limit which will be set every six months.
For the next six months, starting April 1 the limit is USD 3.62 per mmBtu. This effectively means that bidders can corner gas by promising to pay USD 7, but buyers would only be able to pay the USD 3.62 ceiling price. In the tender, ONGC offered to sell 2 mmscmd of gas for a period of 3 to 5 years at Odalarevu in Andhra Pradesh’s East Godavari district, which is connected to state gas utility GAIL’s KG basin pipeline network as well as PIL’s East West Pipeline, which is connected to KG basin network and further to Gujarat gas. “The slope should be greater than or equal to 10.5 percent, according to the tender text, which also stated that ‘P’ can be rendered in 0.1 percent increments.
The auction will take place next week. Bidders discussed the question of the high reserve price during pre-bid meetings. According to a bidder question posted on the ONGC tender paper, bid prices beginning at 10.5 percent of the dated Brent price must be revised downwards to account for cheaper alternatives available from other LNG terminals. According to another bidder, “In terms of the pricing model, we believe that the 10.5 percent starting slope to the dated Brent price is on the high side. Crude oil demand is expected to rebound this year and rise in the near future. There was also a connection with brend in other domestic gas tenders from KG-D6 (2 years ago), but the slope was very modest, ie 8.5 percent.”
