Reliance to produce new gas from D6 by end of June; to cost USD 2.2/unit at current oil prices

Reliance Industries and its partner BP Plc of UK have pushed back the start of production from the second wave of discoveries in their eastern offshore KG-D6 block to end June because of restrictions on the movement of people and material the nationwide lockdown has imposed.

At current Brent oil price of around USD 26 per barrel, the gas from R-Series field in KG-D6 block will cost about USD 2.2 per million British thermal unit -- lower than even the government-mandated rate of USD 2.39 for gas from state-owned ONGC fields.

In an investor presentation post its fourth-quarter earnings, Reliance said it is working on three projects in the KG-D6 block, where production from older fields stopped in February this year.

"First Gas from R-Cluster field expected by June 2020 subject to lifting of lockdown," it said.

Gas production from R-Cluster was to start by mid-May but the coronavirus lockdown has delayed it.

Reliance said it expects to achieve a peak output of around 28 million standard cubic metres per day by FY24 when all three projects are up and running.

Reliance and BP are developing three sets of discoveries in KG-D6 block -- R-Cluster, Satellites, and MJ by 2022.

R-Cluster will have a peak output of 12 mmscmd while Satellites, which are supposed to begin output from mid-2021, would produce a maximum of 7 mmscmd. MJ field will start production in second half of 2022 and will have a peak output of 12 mmscmd.

Reliance in November last year auctioned the first set of 5 mmscmd of gas from the newer discoveries in the KG-D6 block by asking bidders to quote a price (expressed as a percentage of the dated Brent crude oil rate), supply period and the volume of gas required.

Sources said Reliance had in November set a floor or minimum quote of 8.4 per cent of dated Brent price -- which meant that bidders had to quote 8.4 per cent or a higher percentage for seeking gas supplies.

Considering current average Brent price of USD 26 per barrel, the gas will cost around USD 2.2 per mmBtu.

Dated Brent means the average of published Brent prices for three calendar months immediately preceding the relevant contract month in which gas supplies are made.

In the first round of auction in November 2019, Essar Steel, Adani Group and state-owned GAIL bought a majority of volumes on offer. The price at that time came to USD 5.1-5.16 per unit.

But international oil rates have slumped as demand evaporated due to outbreak of coronavirus and lockdowns imposed by countries around the globe.

Essar Steel had picked up 2.25 mmscmd in the country's first transparent and dynamic forward auction that lasted about five-and-half-hours on November 15, 2019, sources said.

Gujarat State Petroleum Corp (GSPC) picked up 1.2 mmscmd while Adani Group and Mahanagar Gas Ltd bought 0.3 mmscmd, sources said, adding GAIL, acting on behalf of fertiliser companies, bought 0.3 mmscmd of gas.

Hindustan Petroleum Corp Ltd (HPCL) had bought 0.35 mmscmd and 0.10 mmscmd went to Gujarat State Fertilizers & Chemicals Ltd (GSFC)/Gujarat Narmada Valley Fertilizers & Chemicals Ltd (GNFC), sources said. In all, 15 customers across sectors such as steel, petrochemicals, city gas, glass and ceramic got gas in the tender, they added.

In the November 15 auction, bidders quoted between 8.5 and 8.6 per cent slope to corner all of the 5 mmscmd supplies available. This translated into a price between USD 5.1 per mmBtu and USD 5.16 per mmBtu at the then prevailing Brent oil price of USD 60 per barrel.

Initially, Reliance had set a floor quote of 9 per cent of dated Brent price, which translated into a gas price of USD 5.4 per mmBtu at USD 60 oil price. But consumers saw this as a very high price considering that imported LNG in the spot market is available at around USD 4 per mmBtu rate currently.

To pacify the consumers, Reliance lowered the floor/minimum quote to 8.4 per cent of dated Brent price.

Reliance has so far made 19 gas discoveries in the KG-D6 block. Of these, D-1 and D-3 -- the largest among the lot -- were brought into production from April 2009 and MA, the only oilfield in the block was put to production in September 2008.

While the MA field stopped producing last year, the output from D-1 and D-3 ceased in February.

Other discoveries have either been surrendered or taken away by the government for not meeting timelines for beginning production. Reliance is the operator of the block with 66.6 per cent interest while BP holds the remaining stake.