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The future is here-IX: Why RIL has a big advantage over ONGC in the KG Basin
Jun 21: Fragmentation of the market is now the new challenge for the oil and gas industry
8Service providers and equipment suppliers increasingly tailor their offerings not at the country or even regional level, but basin by basin or even company by company.
8If ONGC has set the cost benchmarks for equipment services in its KG-DWN-98/2 block, the same set of suppliers may sign up at vastly lower rates for the $ 6 billion RIL-BP block in the same area working on the variable costing model while riding piggyback on the ONGC order.
8The price follower in today's disturbing times has a distinct advantage over the one who sets the benchmark.
8In this context, ONGC's cost of production of gas can be significantly higher than of RIL-BP from an adjacent block.
8The fact that ONGC spurned an earlier RIL offer to share its massive KG Basin infrastructure coupled with early signs of delay in the KG-DWN-98/2 block will widen the price differential
8There are other big advantages of staying behind a national oil company for the RIL-BP duo.
8If for any reason ONGC's gas price is uncompetitive, the government will have to ensure that the price stays viable or its dividend income will plunge.
8For RIL-BP, keeping its breakeven levels lower than ONGC is what will matter in the KG Basin, as it will reap all the policy change advantages which will accrue to ONGC.
8Eventually, when ONGC figures out that working together will yield more clout with the government, both parties will join hands for a common cause, which is to pressurize the government to extract the concessions needed to stay viable and profitable.
8Since only landed imported gas price is the competitive constraint, both ONGC and RIL-BP will have adequate room to maneuver.
8Even as some of the world's most competitive gas producers -- spread over Russia, Canada and US --  struggle to make money, the KG Basin producers will reap in their profits at a gas production cost which will be significantly higher.
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