Gas price hike to add Rs 1,950 cr to ONGC profits this fiscal

The decision is a positive for the company as it will help monetise some of its small and marginal gas discoveries, says Dinesh K Sarraf

State-owned Oil and Natural Gas Corp (ONGC) will rake in about Rs 1,950 crore in additional profit this fiscal from the 46% rise in natural gas prices announced by the government.

After postponing three times, the government yesterday approved a revised formula of pricing almost all domestically produced natural gas from November 1. The current price of $4.2 per million British thermal unit will rise to $6.17 per mmBtu on a like-to-like basis.

Finance Minister Arun Jaitley yesterday said the price from November 1 will be $5.61 per mmBtu on heat value the fuel will generate on gross calorific value (GCV) basis.

But the current $4.2 per mmBtu rate is on net calorific value (NCV) basis, which is roughly 10 per more than heat value on GCV basis. In GCV terms, the current price comes to $3.8 per mmBtu.

Using GCV methodology announced by Jaitley, the price has gone up from $3.8 to $5.61 per mmBtu, over 46% rise. If compared on NCV terms, the price will rise from $4.2 to $6.17 per mmBtu, a 46 per rise.

"The gas price increase is not 33% - from $4.2 to $5.61 as it is not like-to-like comparison. Suppose you sell apples at a particular rate per pound and decide to price the same apple at a higher price per kg, then the increase has to be calculated on like-to-like terms," a senior industry official said.

ONGC Chairman and Managing Director Dinesh K Sarraf said the decision is a positive for the company as it will help monetise some of its small and marginal gas discoveries.

"Every $1 rise in gas price increases our revenues by Rs 4,000 crore and net profit by Rs 2,350 crore," he said.

An almost $2 increase in gas price will result in ONGC net profit going up by about Rs 4,700 crore on an annualised basis. For the five months of current fiscal, ONGC will stand to benefit about Rs 1,950 crore, he said.

The price may however be not enough for some of its deepsea gas finds particularly in the Krishna Godavari basin but the clause in yesterday's Cabinet approval that gas rates will be revised every six months with the next revision being on April 1, spells hope for the company.

By the time the discoveries come on production in 2018, rates would have risen further.

The new price, based on the recommendations of a Committee of Secretaries (CoS) that reviewed the UPA government's gas pricing guidelines of January 2013, would lead rise is gas-based power generation as well as fertilizer cost going up. It will also result in CNG and piped cooking gas (LPG) going up.

Also, the government will get additional revenue of Rs 3,800 crore annually.

The new price will be determined on Gross Calorific Value (GCV) basis and reviewed every six months against the quarterly price changes approved by the previous UPA government based on Rangarajan committee recommendation.