OREANDA-NEWS. February 25, 2011. Global energy major BP's proposed joint venture with Reliance Industries (RIL) for gas distribution in India would bring competition in the sector that is now monopolised by public sector firm Gail India and set the stage for eventually lifting state control on natural gas price, BP India country head Sashi K Mukundan told FE.

The proposed BP-RIL equal joint venture for gas logistics and supply would consider setting up the facilities for import, storage (terminal) and re-gasification of liquified natural gas (LNG). It will also create newer markets in the country for gas by laying new pipeline networks to reach the consumers. BP has a fleet of LNG ships. An LNG terminal costs about a billion US dollars.

“We hope that this model gets replicated by others. That way, you will have multiple players in the market, who can compete with one another. Then the government can step back and say that there is competition out there, which can set the price and the allocation,” Mukundan said. It is the investor, who bears the maximum risk in the capital-intensive business, who will be the most interested in ensuring that gas is produced and is made available to the consumer, he said.

India is the fifth largest energy consumer in the world and its demand has been going up by 4.8% a year for the last two decades. According to official estimates, natural gas accounts for 10% of India's energy mix now, which will go up to 25% in the next 15 years.

To tap the opportunity, BP and RIL would make a combined investment of USD 11 billion as part of a deal announced on Monday which include both the gas transportation business and joint development of Reliance-operated 23 oil and gas blocks in the country.

The JV would look at securing capacity at any of the existing or upcoming LNG terminals or would set up one on its own. Now there are two LNG terminals in the country -- at Dahej (Petronet LNG) and Hazira (Shell) in Gujarat, with a combined capacity of about 15-20 million tonne a year (mta). The two more under construction at Kochi and Dabhol are likely to enhance the total capacity to about 27 mta. The JV would also look at the option of having a floating LNG terminal, which is a ship that can receive and re-gassify imported LNG. “We would look at the most efficient option,” said Mukundan. An LNG terminal on land would cost about USD 1billion, while a floating one would need only USD 300-500 million.

Since gas from Reliance's KG D6 block is now one of the cheapest sources of gas in the country at USD 4.2 per mmBtu, an increase in its price would incentivise higher investments and enhanced gas production. The current price is applicable till 2014.

Now there are different gas prices in the country depending on from where it is sourced, the costliest being imported and re-gassified LNG, which accounts for about 25-30% of domestic consumption at about USD 10 per mmBtu. Price of gas from other sources vary from USD 4.2 to USD 5.75 mmBtu. The consumption of costly LNG indicates that consumers are willing to pay more than the USD 4.2 mmBtu at which RIL's KG D6 gas is sold.

“Clearly, it is in everybody's interest to ensure that gas is produced and is made available to the consumer. The only way we will develop more gas is that we need to have some incentives for doing that,” Mukundan said. RIL's gas output, which represents about 43% of India's 132.83 mmBtu gas production, has reduced the government's fertilizer subsidy noticeably as gas is significantly cheaper than naphtha and furnace oil. The BP India chief said his company would sit with RIL to assess the gas discoveries and field development needs of the 23 blocks and then discuss the matter with the government for a solution.

BP would bring its ability to operate giant oil and gas fields and its deep water experience into its alliance with Reliance, he said. BP has not examined the possibility of collaborating with RIL on shale gas, which is outside the purview of the deal announced on Monday, he said.