'Delay in gas price hike to hurt revenues of RIL, ONGC'

The Indian government's decision to defer, for three more months, the increases in domestic natural gas prices will halve the increase in revenues of upstream producers like Reliance Industries and ONGC in the current financial year, ratings agency Moody's said Thursday.

"The government's decision to implement the gas price increases only at the end of September 2014 is credit negative for the country's upstream gas producers," said Vikas Halan, a vice president and senior credit officer at Moody's.

Prime Minister Narendra Modi government Wednesday deferred by three months a decision on raising the price of locally produced gas, saying a comprehensive discussion was required on the issue.

Halan said Oil and Natural Gas Corporation (ONGC), Oil India Limited, and Reliance Industries Limited (RIL) will be adversely affected because increases in their revenues and EBITDA that would have resulted from the revised prices are further delayed.

If prices had risen from April 1, 2014, Oil and Natural Gas Corporation's revenues for the fiscal year ending March 31, 2015, would have increased by about $3.3-$3.7 billion. Similarly, Reliance Industries' revenues would have grown $400-$450 million over the same period, and Oil India's by $280-$310 million, Moody's said in a report.

Under India's new pricing formula, if the rises had gone ahead on April 1, 2014, then domestic natural gas prices would have nearly doubled by now to $8.0-$8.4 per million British thermal units (mmbtu) from the current $4.20 per mmbtu.

"Increases in revenues for all three companies could be even higher over the next few years, as the production of domestic gas increases with new discoveries, and assuming the government's new formula for reviewing gas prices is implemented," said Halan.

"We expect that every billion cubic metres of gas produced will result in incremental revenue of $135-$150 million," he added.

Moody's pointed out that the ongoing delay in price hikes and the uncertainty around the likely resultant prices will discourage upstream producers from further investments in exploration and production in India. At risk are large planned investments in offshore oil and gas fields, which are not commercially viable at current prices.