Reliance Shifts to Oil Indexation for KG Gas Sales

Reliance Industries Ltd, along with partner BP Plc of the UK, has made a significant strategic move by reverting to oil indexation for pricing the gas extracted from India’s largest private-sector operated field in the KG basin. This decision is aimed at capitalizing on the positive momentum in the oil market. As part of this shift, Reliance and BP have invited bids from potential buyers for 4 million standard cubic meters per day (mmscmd) of gas from the KG-D6 block in the Bay of Bengal, with sales set to commence from December 1, 2023.

Pricing Strategy

In their tender document, Reliance and BP have specified that they are seeking bids from buyers who are willing to quote a price indexed to the Brent crude oil price. This marks a departure from their recent auctions, where gas was priced based on the international gas benchmark, JKM.

Tender Details

The tender, issued on October 27, 2023, invites offers from interested companies to procure gas from the KG-D6 block based on the pricing terms outlined in the Request for Proposal (RFP). The delivery point for the gas is located in Gadimoga, Andhra Pradesh.

Bidders are required to quote a premium ‘v’ over and above 12.67% of the dated Brent crude oil price. The starting bid price for ‘v’ has been set at USD 1.08 per million British thermal unit (mmBtu).

Pricing Dynamics

At the current Brent crude oil price, the initial bid price translates to a gas price of USD 11.8 per mmBtu. However, the final sale price will be determined by the bidding process and will be capped at the lower of the government-mandated maximum rate for gas from difficult fields or the price arrived at through bidding.

Regulatory Framework

The ceiling price for gas from difficult fields, effective from October 1, is USD 9.96 per mmBtu. This means that even if Reliance and BP secure buyers at USD 11.8 per mmBtu, the actual price payable by users will be limited to USD 9.96 until March 31, 2024, in line with regulatory guidelines.

Market Impact

The e-auction for the 4 mmscmd of KG-D6 gas is scheduled for November 21, indicating a proactive approach by Reliance and BP in securing buyers for their gas production.

Environmental Context

Natural gas is increasingly viewed as a transitional fuel that offers cleaner-burning properties compared to traditional hydrocarbons. This shift aligns with global trends towards reducing emissions and adopting sustainable energy solutions.

Production and Usage

Reliance and BP collectively produce around 29-30 mmscmd of gas from three sets of gas fields in the KG-D6 block. The gas extracted serves various purposes, including electricity generation, fertilizer production, CNG for automobiles, and domestic cooking and industrial applications.

This strategic pricing shift by Reliance and BP reflects their adaptability to market dynamics and their commitment to optimizing revenue opportunities in the evolving energy landscape.