Domestic gas price hike of 6% brings small relief for producers: Report

The upcoming increase in the domestic natural gas price by 6 per cent on April 1 for the first six months of 2018-19 might give some relief for oil and gas producers but gas production remains either a

break-even or loss-making proposition for most fields, say reports.

The domestic gas price has been notified at $3.06 per million metric British thermal unit (mmBu) for the first half of 2019, from $2.89 per mmBtu for the second half of 2017-18.

This will increase the cost of manufacturing urea and petrochemicals, for which natural gas is used as feedstock. Reports say this might raise prices of compressed natural gas (CNG) and piped natural gas (PNG), while affecting the margins of the power sector and the sponge iron industry. 

According to CARE Ratings, upstream oil and gas exploration companies such as Oil and Natural Gas Corporation, Oil India, and Reliance Industries will benefit. “The increase in gas price will also encourage the companies to take up more exploration activities as the realisations for the natural gas segment will improve. This will aid in the country’s aim to achieve reduction of oil and gas imports by 10 per cent till 2022 as domestic natural gas production will be augmented,” a CARE Ratings report said. 

On the other hand, CARE Ratings said the raw material cost for the fertiliser industry could increase by 5 per cent. This could put pressure on the finances of the government because Rs 700 billion has been allotted as fertiliser subsidies in 2018-19. 

K Ravichandran, senior vice-president and group head, corporate ratings, Icra, said: “Gas production remains either a break-even or a loss-making proposition for most fields for upstream producers notwithstanding some decline in oil field services/equipment cost. Additionally, the appreciation of the Indian rupee against the dollar in 2017-18 also dampens the realisation of gas producers.” 

He said the lack of a floor and sustained low prices, as had been seen in the past few years after the implementation of the modified Rangarajan formula, made exploration and production unviable even in benign geologies and would act as a barrier towards increasing the share of gas in the energy consumption of the country.

Crude petroleum and natural gas have a 2.46 per cent weight in the inflation index. A 5.9 per cent increase in the prices of natural gas will increase the whole price index by 0.03 per cent.

Additionally, the ceiling on the price for gas produced in deep water, ultra deep water, and high-temperature and high-pressure fields has been announced at $6.78 per mmBtu in the first half of 2018-19. This is 7.6 per cent higher than the ceiling of $6.30 per mmBtu in the second half of 2017-18.