ONGC, OIL & RIL to gain most from rise in gas price

According to industry estimates, every $1 increase in gas price is going to add Rs 3,000 cr to the net profit of PSUs

 

Oil and Natural Gas Corporation (ONGC), Oil India Limited (OIL) and Reliance Industries Limited (RIL) are expected to be the major gainers of a rise in gas prices. According to industry estimates, every $1 rise in the price of gas would add Rs 3,000 crore to the net profits of public sector undertakings and Rs 2,000 crore to those of private companies; the overall industry would see an addition of Rs 5,000 crore a year.

ONGC, OIL and RIL together produce about 85 per cent of India’s total domestic natural gas. These are followed by companies such as Cairn India.

It is likely the Cabinet Committee on Economic Affairs would take up the issue of a rise in gas prices tomorrow. The government is likely to opt for a price of about $6.7 a million British thermal unit (mBtu), against the current $4.2 an mBtu, as the petroleum ministry is batting for such a price. A $2.5 per mBtu rise ($6.7 an mBtu, against $4.2 an mBtu) would add Rs 12,500 crore to the profits of both public and private companies a year.

A price of $6.7 an mBtu would be much below the $8.8 an mBtu suggested by the Rangarajan panel.

The rise in gas prices would hit the power and fertliser sectors. For every $1 rise in the price of gas, fertiliser subsidy is expected to rise by Rs 3,155 crore and the power sector’s losses would soar by Rs 10,040 crore a year.

ONGC Chairman and Managing Director Sudhir Vasudeva said any price above $4.2 an mBtu would be good news, as the company’s average production cost stood at $3.7 an mBtu. “It would add to our future investments. Per-dollar rise would add Rs 2,000-2,200 crore to our net profit, but it would have an impact on our cash retention, owing to our subsidy burden,” said A K Banerjee, director (finance), ONGC.

For ONGC and OIL, the prices would be applicable immediately, buy for others like RIL and Cairn India it would be from April 2014. "The gains are calculated on the simple thumb rule because 60 per cent of the gas produced in the country are by PSUs, while the remaining 40 per cent is by private sector," said a senior official from a private sector company.

 

An IHS CERA report states that the future gas discovery is dependent upon the price of domestic gas due to high exploration and development costs in the country. “Of the estimated 64 trillion cubic feet (TCF) of gas remaining to be found, 24 Tcf is estimated to be found at a gas price of $8 per mmbtu, 36 Tcf at $10 per mmbtu and 64 Tcf at $12 per mmbtu or higher,” the report adds. 
 

“About 40-45 per cent of whatever the company gets due to a hike would go to the government exchequer only,” said T K Ananth Kumar, Director (Finance), OIL.  However, analysts are still skeptical about the profit figures. “All these calculations on revenue front are done simply based on production figures. But we have to add operating expenditure, the rise in production figures etc. Apart from ONGC, RIL, OIL and Cairn India, I do believe that small players like Niko and HOEC are also going to reap benefit out of a hike,” said said Deepak Mahurkar, who heads oil & gas industry practice at PricewaterhouseCoopers India.
 

Meanwhile, a decision is likely to bleed the power and fertilizer consumers too. “The common man is going to pay Rs 2 more for power just for the sake of companies like RIL.  Even fertilizer prices would also increase by Rs 6000 per metric tonne. At least they have to wait till the next Parliament session before taking such a crucial decision,” said CPI MP, Gurudas Dasgupta.