A positive move for orderly growth of market: Analysts

A day after the government doubled the price of natural gas produced by public sector majors ONGC and OIL, analysts said the move was a positive development for the orderly growth of the domestic gas market.

This will also help the profitability and cash flows of upstream players such as ONGC and OIL, who have been making losses in the last couple of years from the sale of administered price mechanism (APM) gas produced in nomination blocks.

The government’s move also clarifies the pricing structure and effectively ends the difference in pricing mechanism for state-owned and private gas producers. Analysts are also unanimous in their view that buyers of regulated gas — power or city gas companies — will pass on the increased prices to end-consumers.

According to ratings firm Icra, with the proposed move, consumers will get used to the market-determined pricing of gas, as barring the North-East, they will now have to buy gas at market-determined rates.

Moreover, with gas production from the nomination blocks declining steadily, incremental domestic demand is, in any case, being met by production from new domestic fields and imported liquefied natural gas (LNG), which was more expensive than APM gas until now. Icra has termed the APM gas price rise a positive development for the orderly growth of the domestic market, as more than 65 per cent of the market is already deregulated in terms of prices and a continued controlled price regime was distorting the consumers’ expectations on pricing.

Goldman Sachs, in its analysis, said “Coming on the heels of the Supreme Court judgment on D-6 gas pricing, this government decision in our view pre-empts any concession during the RIL-RNRL negotiations and also makes imported LNG prices relatively more competitive. It remains to be seen, however, if the price rise encourages state-owned gas producers to develop marginal, higher-cost gas fields — which would increase domestic gas production.”

The global investment firm further observed that fertiliser firms would likely face higher losses if urea prices were not increased, which may need government subsidy. The gas price rise might negatively affect inflation and the government’s fiscal deficit (from higher fertiliser subsidy), it added.

Financial services provider India Infoline notes this is a positive development, as the earlier expectation was for a gradual increase in the gas price. “This also shows the government’s commitment to accelerate reforms in the sector. We now attach a higher probability to deregulation of petrol prices when the Empowered Group of Ministers meets in the first week of June. “The government’s commitment to reforms could lead to deregulation of petrol prices next month. If such a reform is introduced, this would result in a reduction in the total annual subsidy bill by Rs 600 crore in 2010-11 (crude price assumed at $75/bbl),” it adds.