New gas price needed fast to boost output, say analysts

With the cabinet deferring till mid-November its decision on revising domestic natural gas prices, analysts said it needed to be announced quickly as non-remunerative prices for producers and policy uncertainties had led to plunging domestic output.

The government in June had previously deferred a decision on revising the current price of $4.2 per unit till Sep 30 for holding wider consultations.

"The government needs to quickly fix the pricing policies for oil and gas as part of a broader objective of enhancing India's energy security. Non-remunerative pricing and policy uncertainties have led to sluggish domestic production, resulting in rising energy deficit and imports," Kotak Institutional Equities said in a report.

"Higher natural gas (and crude oil) prices are essential to sustain the extant production of the upstream companies, given rising operating costs and significant reinvestment in mature fields to simply sustain production," it added.

Financial services firm UBS as well as Bank of America Merrill Lynch (BofA-ML) expected a gas price of around $6.5 per unit to be approved as opposed to $8.3-8.4 per unit accepted by the previous UPA government on the basis of a formula recommended by the C. Rangarajan Committee.

"While there is no clarity on the implementation timelines, we assume increased prices to be effective from January 2015 onwards or latest by April 2015," UBS said.

UBS believes gas prices will be increased as "the rationale for high cost of developing new gas fields has been well debated, and domestic production needs to be raised to offset imports of higher-priced LNG."

UBS estimates the current fiscal's negative earnings per share impact could be 4-10 percent for all gas producers "and this would also push back gas production ramp up over the medium term".

BofA-ML expected no more delays with the decision as the government lawyer has told the apex court it will be done by Nov 14

The Supreme Court is hearing two public interest litigations against a price hike for gas from Reliance Industries KG-D6 block in the eastern offshore. In its last hearing Sep 18, the court had asked the government to clarify its stand on the gas price hike decision taken by the UPA government.

The four-member Committee of Secretaries (CoS) set up by the government to review the gas-pricing formula has submitted its report to the petroleum ministry. The committee's brief is to examine the whole range of issues related to gas pricing, including the Rangarajan Committee formula, which was approved by the previous UPA government but could not be implemented as the Election Commission barred price announcement in the period leading up to general elections.

Meanwhile, a committee led by former finance secretary Vijay Kelkar has recommended market-linked pricing for domestic natural gas.

A consultation paper sent to the petroleum ministry by the Kelkar Committee, formed by the previous UPA government last year to suggest a roadmap for cutting import dependency in the hydrocarbon sector by 2030, has suggested market determined pricing for natural gas to make new exploration and production activities viable.

The Parliamentary Standing Committees on Finance as well as Petroleum had called for a review of the formula suggested by the Rangarajan panel, saying gas price should have some linkage with the cost of production.

In their submission to the secretaries' panel, energy producers have called for a natural gas pricing policy that is "legitimate, relevant and credible" to maintain investor interest in the Indian hydrocarbons exploration sector.

State-run explorer Oil and Natural Gas Corp has said it needs $6-7.15 per unit to break even on gas it plans to produce from its KG basin block and a price of between $5.25-17.80 per unit to break even on production planned from seven small fields in the western offshore.