Domestic gas price to be raised by 60% from Oct: ONGC's Subhash Kumar

India’s natural gas producers expect some cheer as the domestic gas price is set to rise after having fallen for two consecutive years. “The price of domestically produced natural gas will increase by 50-60 per cent for the October 2021-March 2022 period,” ONGC Chairman and Managing Director Subhash Kumar said. 

This will offer relief to exploration companies that have found it hard to sustain profitability in the face of low domestic price. At present, the domestic gas price is $1.79 per mBtu (million British thermal units). The maximum sale price that is allowed for gas produced from high pressure high temperature, deepwater, and ultra-deepwater areas (collectively called difficult discoveries) is $3.62 per mBtu.

Despite the imminent hike, the domestic price is likely to remain below $3 per mBtu and the ceiling price of gas from difficult discoveries will be less than $6 per mBtu.

Since 2014, domestic gas prices have been determined by a formula that takes into account the weighted average of natural gas price at global gas hubs. The ceiling price of gas from difficult discoveries is linked to the landed price of alternative fuels. Both these prices move largely in the same direction. Domestic prices are calculated taking into account international prices, but with a three-month lag. This means the price for October-March 2022 will be determined based on global prices till June 30.

While a boon for consumers, the currently low prices put significant pressure on upstream companies that explore and produce natural gas. ONGC, Oil India (OIL), Reliance Industries (RIL), BP, and Cairn Oil and Gas (a unit of Vedanta) are among the prominent players that will benefit.

Among projects that would benefit from the price hike would be RIL and BP’s R Cluster, an ultra-deepwater gas field in block KG D6, off the eastern coast of India. ONGC’s KG-DWN-98/2 project would also be a big beneficiary. Cairn Oil & Gas stands to gain as it produces natural gas from its largely oil-bearing block in Rajasthan.

“Domestic companies are comfortable with natural gas price at $3.5 per mBtu or above. This might not be attained in the upcoming price revision, but it may be possible in the one after that. So domestic gas price may top $3.5 per mBtu in the April 1, 2022, to September 30, 2022, price revision,” said Sabri Hazarika, senior research analyst at Emkay Global Financial Services.

“A price of $7-8 per mBtu is remunerative for gas produced from difficult discoveries. These price levels are expected to be attained in the April 1, 2022, to September 30, 2022, price revision,” he said. This would mean higher costs for domestic gas consumers. According to an analysis by Care Ratings, 31 per cent of domestic natural gas is used by power sector, 27 per cent by fertilisers, and 19 per cent in the city gas distribution sector. India meets half of its natural gas requirements via domestic production, the rest is through imports.