Reliance seeks minimum $14 for gas from CBM block

Reliance Industries Ltd is seeking a minimum of $14 for selling natural gas being produced from coal seams in a block in Madhya Pradesh as it looks to cash in on the recent spike in energy prices globally.

Reliance sought bids from users for the sale of 0.65 million standard cubic meters per day of gas from its coal-bed methane (CBM) block SP-(West)-CBM-2001/1 for a one-year period beginning April 1, 2022, according to a Notice Inviting Offer (NIO) published by the firm.

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Bids have been sought at a premium over the base of 14 per cent of the Brent crude oil price.

"A Bidder shall be required to quote the variable denoted as 'V' in USD per million British thermal unit terms as a positive number pursuant to the gas price formula" of "14 per cent x Dated Brent + V," the NIO said.

The starting ticker for 'V' has been kept at $1 per mmBtu, which means bidders will have to quote at least $1 plus 14 per cent of dated Brent crude oil to buy the CBM gas.

Brent crude oil is currently trading above $92.5 per barrel and at this price, the floor rate for Reliance gas comes to $13 per mmBtu. Adding 'V' of $1, the minimum price comes to $14 per mmBtu.

The sale price will be higher of the bid price or the government-approved rate for domestic gas, NIO said.

The government dictated price for gas produced by state-owned firms such as ONGC presently is $2.90 per mmBtu.

The rate Reliance is seeking is higher than the price at which the company had sold the same gas last year.

Gas will be delivered at Shahdol in Madhya Pradesh, which is connected to the nationwide gas pipeline network through the HVJ pipeline, the NIO said.

Last year, Reliance had sold three-fourths of the gas from the same CBM block to an affiliate of the company. India Gas Solutions Private Limited, a 50: 50 joint venture of Reliance and UK's bp, bought 0.62 mmscmd out of 0.82 mmscmd gas bid out in that auction.

State-owned gas utility GAIL India Ltd cornered 0.17 mmscmd while 0.03 mmscmd was picked by Reliance Gas Pipeline - the entity that transports gas from the CBM blocks in Madhya Pradesh to consumers.

The price bid was 9.2 per cent of the prevailing rate of Brent crude oil price, which translated into a rate of $8.5 per mmBtu at current oil prices.

In the last year's auction, Reliance had sought bids for 0.82 mmscmd. Bids were initially sought at 9.5 per cent of Brent rate as the base or minimum price and asked bidders to "enter bids that are higher than or equal to it." It later lowered the base price to 8.7 per cent of Brent.

At the current $92.5 per barrel Brent crude oil price, the price of gas produced from coal seams, called CBM, comes to $8.5 per mmBtu.

Reliance started commercial gas production from the CBM blocks in March 2017 and reached a peak of 3 mmscmd before the end of 2018.

CBM is natural gas stored or absorbed in coal seams and contains 90-95 per cent methane.

The pricing formula used last year and this year is a variation over the 2017 formula when Reliance had sought bids in the form of a deductible from 12.67 per cent of prevailing Brent crude oil price plus $0.52 per mmBtu plus $0.26 per mmBtu.

In that bidding for up to 3 mmscmd of gas, Reliance had outbid rivals including GAIL to buy the entire volume.

Last year, Reliance and its partner BP plc of UK bid out 7.5 mmscmd of gas from its eastern offshore KG-D6 block by pricing the fuel at JKM (Japan Korea Marker).

The JKM represents the price for spot LNG delivered in the Asian market and is now being widely used in the LNG industry as a marker for medium/long-term LNG contracts instead of traditional linkage to oil.

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