Gas price cut will hit investments in new reserves: Moody's

An 18 per cent cut in natural gas prices will discourage further investments in exploring and developing new gas reserves, Moody's said in its Credit Outlook report today.
It said the move is credit negative for producers like Oil and Natural Gas Corp (ONGC) and Oil India Ltd (OIL) as it will lower their revenues and cash flows.
From October 1, gas prices have been reduced to USD 3.82 per million British thermal unit (mmBtu) from USD 4.66 previously on a gross calorific value basis.
"The gas price reduction will have its greatest effect, in absolute terms, on ONGC, the country's largest producer of natural gas.

"At present sale volumes, we expect ONGC's revenue to decline by about USD 300 million (approximately Rs 2,000 or 1.2 per cent of total revenues for fiscal 2015, which ended 31 March 2015) for the six months between October 1 and March 31," the global credit rating firm said.
OIL revenues, it said, would decline by about USD 33 million (approximately Rs 220 crore or 2.3 per cent of total revenues for fiscal 2015) for the same six month period.

India relies on natural gas imports to meet its energy needs.
Imports accounted for 36 per cent of the total natural gas consumption in India for fiscal 2015 and 39 per cent for the five months between April 1 and August 30, 2015.

"Imports will continue to increase as low international gas prices stimulate demand for natural gas and low domestic prices discourage further investments by upstream players to explore and develop new gas reserves.
"When oil prices are low, upstream players cannot economically produce from difficult terrains such as deep water, where costs are substantially higher," the report said.
As per the new gas pricing formula approved in October 2014, the domestically produced natural gas price is revised every six months.
Gas prices in India are determined by taking a volume-weighted annual average of the prices prevailing in Henry Hub (US), National Balancing Point (UK excluding Russia), Alberta (Canada) and Russia.

Prices are calculated on the trailing 12-month data with a lag of one quarter.
"With benchmark prices still low, the government-mandated domestic natural gas price is likely to remain muted over the next 12-18 months. Our assumption for Henry Hub natural gas prices for 2016 is USD 3.00 per mmBtu and USD 3.25 per mmBtu for 2017," Moody's said.