KG basin gas auction: ONGC agrees to remove marketing margin, won’t lower floor price

• In a final pre-bid query response, ONGC said that it has not agreed to change in Reserve Gas Price

• ONGC had sought bids for the auction of initial 2 Million Standard Cubic Metres Per Day (MMSCMD) of gas from its KG-DWN-98/2 block in KG basin

New Delhi: State-run Oil & Natural Gas Corporation (ONGC) has agreed to remove the marketing margin of $0.20/MMBTU on the gas it is ready to auction from its KG-DWN-98/2 in the deep-sea block in KG basin. However, it has to refused to lower the minimum rate. In a final pre-bid query response, ONGC said that it has not agreed to change in Reserve Gas Price. The E&P major, however, added, "Considering requests from various bidders, levy of Mktg. Margin of $0.20/MMBTU over and above contract price is removed."

ONGC had sought bids for the auction of initial 2 Million Standard Cubic Metres Per Day (MMSCMD) of gas from its KG-DWN-98/2 block. 

ONGC KG basin gas e-auction: No change in Reserve Gas Price

According to the tender documents bidders are required to quote valid bids against the three parameters —  Initial Price, Tenure of the Contract and Volume. It added, "The "Reserve Gas Price" (in USD/MMBTU on GCV) is "10.5%* Dated Brent Price." 

"Dated Brent Price" for any month shall be the arithmetic average of the mean values of the high and low assessments of the benchmark crude oil "Dated Brent" (Platts Symbol: PCAAS00) as published in "Platts Crude oil Marketwire" in USD per barrel for each Day during the immediately preceding 3 (three) calendar months (rounded off to 3 decimals), from the relevant month in which gas supplies are made. The product of Quoted Slope (%) and Dated Brent Price, will be determined as a value in USD/MMBTU for the purpose of arriving at the Gas Price," it added.

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Bidders are required to quote 'P,' which would be the slope to Dated Brent Price. This slope should be more than or equal to 10.5 percent, said ONGC. This essentially means that the floor or the minimum rate has been fixed at 10.5 percent of the three-month average of Brent crude oil price. The marketing margin of $0.20/MMBTU was to be levied earlier over and above the contract price.

Bidders flagged marketing margin levy, 'high' reserve gas price

In the pre-bid queries sent to ONGC, potential bidders flagged the levy of the marketing margin and the 'high' floor price. One of the bidders said, "Regarding pricing formula, it is of our view that the starting of slope to dated brent price at 10.5 percent is quite higher side. Crude oil demand is going to recover this year and it is going to increase in short term. In other domestic gas tenders from KG D6 (2 years back) was also linkage with brent however the slope was very low i.e. 8.5 percent. Also, our gas consumption points are in western and northern part of India and the location of gas field on eastern side also adds up transportation cost of multiple transporters. Considering above factors, we request for reduction in slope "P" from 10.5 percent to 8.5 percent." 

Raising the same concern, another bidder said, "In the current global/local gas market scenarios with improved market priced domestic gas availability, Spot LNG with endless flexibilities matching to specific requirements of customers, uncertainty of demand and affordability of small scale manufacturing sector, proposed "Reserve Gas Price" (in USD/MMBTU on GCV) of "10.5 percent" is not reflective of current market reality. Also, in the instant case, considering marketing margin of USD 0.20/MMBTU on GCV basis plus Rs.16.14 transportation tariff of KG basin pipeline network upto PIL interconnect point, the "Reserve Gas Price" (in USD/MMBTU on GCV)  works out to be morethan 11.0 percent. In view of the above, ONGC is requested to consider pragmatic gas "Reserve Gas Price" of "8.5 percent" offering win – win proposition to ONGC and prospective bidders."

However, responding to these queries, ONGC said categorically, "Change in Reserve Gas price is not agreed…"

The backdrop

The e-auction is to be conducted on May 20 at 11.30 am. ONGC has offered to sell 2 MMSCMD of gas for a duration of three to five years from Odalarevu Onshore Terminal in East Godavari district of Andhra Pradesh. The terminal is connected to GAIL's KG basin pipeline network and PIL's East West Pipeline. Gas supplies from the block is set to start from June-end this year. 

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