What the gas price hike means

The decision is likely to hit power and fertiliser sectors the most

The Cabinet Committee on Economic Affairs (CCEA) has decided to double the price of domestic natural gas, from $4.2 to $8.4 a million British thermal unit (mBtu), from April next year - a decision that might hit the power and fertiliser sectors the most.

 

According to an official source close to the development, CCEA, headed by Prime Minister Manmohan Singh, decided the government would absorb the losses the power and fertiliser sectors were going to face. However, the quantum of absorption would be determined by the ministries concerned.

 

The decision could cause a loss of Rs 42,000 crore for about 28,000 Mw of power capacity dependent on gas, while the fertiliser subsidy might rise by Rs 13,200 crore a year. On the other hand, the price increase to $8.4 an mBtu will add Rs 21,000 crore annually to the profits of major public and private sector companies.

 

While Oil and Natural Gas Corp (ONGC) and Reliance Industries Ltd (RIL) will be the biggest gainers from the gas price hike, power and fertiliser companies will see their fuel costs shooting up substantially. RIL’s earnings per share (EPS) will go up by 7 to 8% and the price hike will give incentives to the company to restart investments in its K-G basin off the Andhra coast, say analysts.

Similarly, as the production of ONGC and Oil India is higher, its EPS will go up by 7% for every one dollar increase in gas prices. According to a Macquarie Equities Research report, $1 per mmBtu hike could add 2% to FY15E profits.

 

The country's largest power generator, NTPC Ltd, said the hike would be passed on to consumers. Every dollar increase in gas price leads to a 50 paise jump in the cost of generation for NTPC. The company operates 4,900 Mw of stand-alone gas-based capacity and an additional 2,000 Mw capacity in joint ventures. Meanwhile, fertiliser manufacturers believe the move would add another Rs 13,200 crore to the government subsidy outgo. 

Analysts say the gas prices are denominated in the US dollar and the recent volatility in the dollar versus Indian rupee exchange rate could further accentuate domestic gas price in rupee terms.

Rs 5,000 cr

. Addition to annual profits of public and private sector majors

 

Rs 10,040 cr 

. Annual loss to the power sector at 70% PLF* for 28,000-Mw capacity

( *Plant load factor )
 

Rs 3,155 cr 

. Annual addition to subsidy for 23 MT urea production (from 2013-14)

 

Rs 706.7 cr

. Annual rise in govt royalty


Rangarajan's formula

.  Arm’s-length price in India: 12-month average of volume-weighted
. Net-back pricing at well head for gas producers who export to India

. Price of US’s Henry Hub, UK’s NBP and Japan’s JCC linked price

Key recommendations

. Do away with the cost-recovery mechanism; government share the overall revenues of the contractor, without setting off costs

. Extend I-T holiday from 7 to 10 years

. Extend exploration time for frontier/deep-water blocks from eight to 10 years

. Conduct audit by CAG/CAG empanelled auditors on the basis of financial materiality of a block

Implication: Gas price of$8.8 an mBtu

History of Gas Pricing in India

. Jun 2005: Tariff Commission set up look into pricing issues

. Sep 2007: RIL’s KG-D6 basin gas price fixed at$4.2 per mBtu

. May 2010: Price of administered gas more than doubled from subsidised level; from $1.8 per mBtu to $4.2 per mBtu

. December 2012: Rangarajan committee submits its report on gas pricing
. June 27, 2013: Govt okays doubling of natural gas price to $8.4 mBtu with effect from April 2014