Natural gas price cut by 20%

More than double of $3.06 new notified price for natural gas produced from other fields

The petroleum ministry announced on Thursday a 20 per cent cut in domestic natural gas prices to $3.06 a million British thermal units (mBtu), on a gross calorific value basis for a six-month period beginning April, as against the current $3.82 an mBtu.

The ministry also notified a price ceiling of $6.61 an mBtu, following new pricing norms for difficult fields. The ceiling is a little more than double the price of gas from other fields.

The ministry's Petroleum Planning and Analysis Cell announced the new rates in letters to upstream entities Oil and Natural Gas Corporation (ONGC) and Oil India (OIL), and the regulator, the Directorate General of Hydrocarbons.

In a separate letter to the same recipients, the ministry’s technical arm said the gas price ceiling for April-September would be $6.61 per mBtu for discoveries in deep water, ultra-deep water and high pressure-high temperature areas. The government had earlier this month decided on pricing and marketing freedom to companies for output from difficult fields, the ceiling was to be based on the average of three alternate fuels in the past one year, with a quarter's lag. The 20 per cent cut in domestic prices will directly impact the revenue of producers by Rs 3,000 crore to Rs  3,200 crore during the first half of financial year 2016-17, India Ratings & Research said.

OIL and ONGC, which contributed 75 per cent of total domestic production, would bear the brunt, it said.

An ONGC spokesperson refused to comment on the impact. Its finance director, A K Srinivasan, had in January said every dollar's decrease in the price led to an impact of Rs 2,000 crore on a total volume basis. Based on that, the 20 per cent cut in price could impact ONGC earnings by around Rs 1,500 crore.

The new price would not impact Reliance Industries, as the price the company is allowed to charge from its gas reservoirs in the eastern offshore KG-D6 block is capped at $4.2 per mBtu, pending resolution of the arbitration over cost-recovery on account of shortfall in production from the D1 and D3 discoveries. The difference between the two prices is currently credited to a gas pool account.

According to India Ratings, the revised pricing will pose viability challenges for fields with production cost upward of $3 per mBtu. In the mid-stream segment, GAIL might see lower trading revenue of the order of Rs 1,700-1,800 crore from the sale of domestic gas during the first half of 2016-17.

The cut is also likely to translate to reduction in piped natural gas (PNG) prices for consumers, between 50p and Re 1.5 per standard cubic metre (scm), apart from an 80p to Rs 1.5 a kg cut in compressed natural gas (CNG). The move will also benefit fertiliser, power and steel companies, which rely heavily on natural gas in the form of lower working capital requirement.

Between October 2015 and March 2016, the price of CNG’s alternate fuel, diesel, rose eight per cent, while CNG's did not change, increasing the latter's competitiveness. However, the amount of benefit passed on to consumers might vary across segments and regions, as the pricing power for CNG and PNG lies with city gas distribution entities.