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Essar, Reliance aim to produce 6.5 MMSCMD coal bed methane in next two years

NEW DELHI: India's gas supply is expected to get a boost from coal bed methane (CBM) after the government removed uncertainty over its pricing. Essar Oil and Reliance IndustriesBSE 1.31 % will add about 6.5 million standard cubic meters per day CBM output in the next two years, which is enough to generate about 1,573 mw of power.


Essar is expected to commence gas production from its Raniganj CBM block next year while 
RILBSE 1.31 % would start CBM output from its two blocks in Sohagpur inMadhya Pradesh a year later, oil ministry officials said. RIL is expecting 3.5 mmscmd of peak output from its two blocks. 

Essar said its 
Raniganj block was close to moving to the commercial phase. "We have drilled over 150 wells and are producing about 100,000 standard cubic meters of gas per day. This is expected to rise to 3 mmscmd by end of 2014," an Essar spokesperson said. 

India’s gas supply is expected to get a boost from coal bed methane (CBM) after the government removed uncertainty over its pricing.

Great Eastern Energy Corp Ltd (GEECL), India's first CBM producer, which is producing about 0.5 mmscmd gas from its Raniganj block, is also expected to raise the output to 3 mmscmd by 2017. One mmscmd gas can generate 242 mw power, industry executives said. "Both Reliance and Essar will now be allowed to sell CBM according to the gas pricing formula approved by the Cabinet Committee on Economic Affairs last month. As per the decision, the formula will be applicable to all sources of gas including CBM from April 1, 2014," a senior oil ministry official said. 

Reliance and Essar have been unable to develop their CBM fields due to lack of the pricing approvals. The two companies had discovered market price for their respective blocks more than two years ago, but the oil ministry could not approved their pricing proposals because RIL's discovered price was almost threetimes more than Essar's rate, oil ministry officials said. Essar's discovered price was $4.2/unit, while RIL had discovered rate was $12.93 per unit, officials said. "Our proposal submitted on the basis of an open price discovery gives an arms length basis for pricing CBM gas in accordance with the contracts. This proposal, however, is still awaiting government approval. Price approval in accordance with the contractual provisions alone can encourage further 
investments in CBM gas resources," Reliance Industries spokesman said. 

Essar also said the contract required for price discovery process but the government would take the final decision on price. "We understand that the price as per the recommended formula would be around $ 8.40/ mmBtu when it comes into effect in April 2014 which will be reviewed quarterly using the data for four quarters with a lag of one quarter and to be used as price across all sectors of users. The detailed mechanism would be clearer once the pricing guidelines are notified by the ministry," an Essar spokesman said. 

Oil ministry officials said they would start the process to formally inform Essar and RIL about the approved price after it would receive minutes of the CCEA meeting. 

GEECL chairman YK Modi said the new formula would not be applicable to company's CBM block in Raniganj because its price was fixed long ago through a contract. "As per the contract, our CBM price is fixed and only if the operator wants it could approach the government for a price revision after five years." GEECL's Raniganj CBM is priced at $6.79 per unit. Essar is currently selling incidental gas in very small quantity from its Raniganj block at $6.25 per unit, which has been temporarily approved by the oil ministry pending approval of the Rangarajan formula, officials said. Commenting on the impact of new gas price formula on Essar, a Macquarie Research report said: "Essar Oil would be positively impacted, as CBM production (also falling under the same pricing ambit) would receive a boost. Currently, they are selling 0.1 mmscmd at $6.25/mmBtu."