Domestic gas supply, which had been increasing since 2008-09, peaked in 2010-11 with the Krishna-Godavari (KG)-D6 basin starting production. However, supply fell in the following two years as production from KG-D6 dropped below anticipated levels. In 2015-16, supply fell further and reached the 2006-07 production level. The KG-D6 production loss is likely to be compensated by new production from the offshore fields of the Oil and Natural Gas Corporation (ONGC) and the Gujarat State Petroleum Corporation (GSPC) in the KG basin. The Mahanadi basin is also expected to contribute to production starting 2018-19. In the short term, most of the incremental supply is expected to come from the eastern offshore basins, to compensate for the production shortfall from existing fields. Moreover, augmentation efforts and the development of marginal fields are expected to offset the decline in production.
Incentivising the oil and gas sector
On the policy front, the government introduced a slew of measures to incentivise oil and gas companies to undertake greater exploration activities. The Union cabinet approved the Hydrocarbon Exploration and Licensing Policy (HELP) in March 2016. The policy is based on the revenue sharing model, which is simple and easy to administer and requires a single licence for the exploration and production of conventional as well as non-conventional hydrocarbon resources and gives players the option to select the exploration blocks without waiting for a formal bid round.
In order to grant marketing and pricing freedom for gas produced from high-pressure, high-temperature (HPHT), deepwater and ultra-deepwater areas, the Cabinet Committee on Economic Affairs introduced a new gas pricing policy in March 2016. The policy guidelines will be applicable to future discoveries as well as existing discoveries in those areas which are yet to commence commercial production (as on January 1, 2016). The marketing freedom so granted will be capped by a ceiling price arrived on the basis of the landed price of alternative fuels. The decision is expected to result in the monetisation of 28 discoveries leading to substantial investment by contractors. The gas price ceiling for HPHT fields is $5.3 per million British thermal unit (mmBtu) till March 2017 and will get revised every six months based on the ceiling price formula.
In line with the government’s vision of reducing the country’s oil imports by 10 per cent by 2022, the Ministry of Petroleum and Natural Gas announced the Discovered Small Field (DSF) Bid Round, 2016 in May last year. Bids were invited on the revenue sharing contract model. The bid round took place in a challenging global market environment when oil and gas prices were volatile and investment in the exploration and production sector was witnessing a substantial decline. Despite these challenges, the response to the DSF bid round has been very favourable.
Domestic supply of gas has declined over past five years and is likely to be insufficient to meet the burgeoning domestic demand. This excess demand can be met by liquefied natural gas (LNG) for which there must be increased focus on building regasification capacity. In 2015, global LNG trade reached 244.8 million tonnes (mt), marking the highest level for LNG trade in the industry’s history and rising above the previous high of 241.4 mt in 2011. Several new plants delivered their first cargo, contributing 6 mt of new supply. However, the expectation of LNG oversupply in 2016 did not materialise owing to factors such as a weak oil environment pushing down market prices, and old plants suffering from outages and new ones getting delayed. Having said that, the outlook for global production of gas remains bullish with an oversupply expected till 2022.
The way forward
Increasing energy demand provides an opportunity for gas, particularly LNG, to capture this demand. Global LNG markets are attractive for buyers in the short to medium term due to LNG oversupply and lower spot LNG prices (due to low crude oil prices). Recently, a notable trend has been an increase in short-term trading, which reached 30 per cent of the overall volume in 2015. It is expected to increase further due to flexibility in LNG available from the US and greater availability of uncontracted and uncommitted LNG from various liquefaction plants. The changing market dynamics of the oil and gas industry make it susceptible to price volatility. To counter this, various hedging strategies could be adopted by buyers for better risk management. w
Based on a presentation by Nitin Zamre, Managing Director, India, ICF International, at a recent India Infrastructure conference