Ceiling price for gas from difficult areas may come down

New gas pricing norms likely to make production more viable

The new pricing guidelines for natural gas production from difficult fields might make investment in these more viable but analysts expect the ceiling price to fall and touch $4.5 a million British thermal units (mBtu) by the first half of 2017-18.

This would only be a tad ($0.3) higher than what Reliance Industries (RIL) currently gets for its gas from the D1 and D3 discoveries in the Krishna-Godavari basin.

ICICI Securities, in its latest report on upstream (unrefined) oil and gas, said it estimated the ceiling in line with the formula announced last week at $6.9/mBtu in the first half of 2016-17, $5.3/mBtu in the second half and $4.5/mBtu in the first half of 2017-18. RIL’s current production does not come under the notified price for existing production. Pending arbitration, it continues to get the old price of $4.2, set in 2008.

Analysts estimate the current ceiling price to work out around $6.9/mBtu. New discoveries of both Oil and Natural Gas Corporation (ONGC) and RIL would take at least two years to come into production, after approval of their development plan by the government. These companies are in the process of revising their calculations, based on reduced costs and expected gas price.

The report said ONGC and RIL’s existing deepwater gas discoveries might become viable for development at a price under the new formula. Gas under the new formula would be $2.4-3.4/mBtu (92-105 per cent) higher than that under the prevailing formula for existing production. RIL’s undeveloped discoveries in the KG-D6 block would get a new formula only if it withdraws its litigation/arbitration petition on pricing.

The price for current production, the formula for which was notified in October 2014, might fall to $2.2 an mBtu in the first half of 2017-18. “There is a six to 20 per cent downside to ONGC’s and Oil India’s (OIL) FY17-18 earnings per share,” the report said.

Under the existing formula, the gas price declined from $5.6/mBtu in the first half of 2015-16 to $4.2/mBtu in the second half of 2015-16. “We estimate the price to decline to $3.5/mBtu in the first half (H1) of FY17, $2.8/mBtu in H2 of FY17 and $2.2/mBtu in H1 of FY18.”

The new marketing and pricing freedom, subject to a ceiling based on landed price of alternative fuels, for future gas production from deepwater and other tough areas will make development of 6.75 trillion cubic feet of gas of ONGC, RIL and other players viable, and boost output by an estimated 35 million standard cubic metres a day in the medium term. “However, if the global low oil and gas price environment continues, the gas price under the prevailing formula for existing production might halve over the next 12 months and hurt ONGC-OIL’s earnings outlook,” the report said.

The government had last week also extended the production sharing contract (PSC) of 28 fields, with 10 per cent higher profit share. “Cairn’s main Rajasthan asset PSC was not extended but it appears its extension would be only with 10 per cent higher profit petroleum share than under current PSC terms,” said the report.