Govt mulls domestic gas floor price system to protect explorers' margin

Govt proposes to implement new floor price mechanism for gas produced from domestic fields by companies such as ONGC to prevent fuel price from crashing below a threshold in subdued market conditions

The government proposes to implement a new floor price mechanism for gas produced from domestic fields by companies such as the Oil and Natural Gas Corporation (ONGC) to prevent the fuel price from crashing below an identified threshold in current subdued market conditions.

Domestic gas price has fallen to $1.79 per million British thermal units (mmBtu) for the October-March period of the current fiscal. The administered price of the gas has fallen in the last four six-monthly revision cycles and has now reached the lowest price levels since 2014. At this level of natural gas prices, exploration companies such as ONGC actually lose money on fuel as tariffs crash.

Sources said the Petroleum Ministry is considering a proposal under which domestic gas will have a floor pricing that would be linked to gas prices with the Japan-Korea Marker, a benchmark index used to determine LNG tariff in North Asia with a discount.

With JKM prices hovering over $5 per million British thermal units (mmBtu) even with a $1 mmBtu discount, the Indian gas floor price under this formula will be close to $4 mmBtu. This is much higher than the government's current administered price of natural gas and would give necessary margins to oil explorers to economically maintain gas production cycles.

"Nothing has been finalised on having a gas floor price as of now. A panel in the Petroleum Ministry is looking at various options and the best course would be adopted that has little impact on consumers but also supports oil and gas companies with remunerative and sustainable gas prices," said a source.

While a gas floor price at this juncture would benefit oil companies, it could render the price of piped natural gas to households and CNG for transportation expensive.

The average cost of gas production for the country's largest public sector oil company ONGC is about $3.7/mmBtu, much higher than the current regulated price of natural gas at $1.79/mmBtu. If the current demand cycle in the oil market sustains, gas prices may fall even further.

Lower gas price is bad news for the ONGC as it would mean further suppressed margins and losses. The company is set to lose close to Rs 6,000 crore on low gas prices this year, brokerages have said.

Brokerages have put ONGC's FY22E gas price at $3.6-4.2/mmbtu depending on discount to JKM price if the new floor price is implemented. With low LNG liquefaction capacity addition ahead, JKM spot futures for FY22-FY26E are expected at $5.2-5.8/mmbtu vs $4.7-4.1/mmbtu in FY20-FY21E.

Petroleum Ninister Dharmendra Pradhan has said earlier that India will phase out price controls in natural gas and make it market-linked soon.

--IANS

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