Natural gas price far below average production cost: Icra

Natural gas prices in India are well below the average cost of production after rates were cut for the fifth time in two years, Icra said today.
Following the implementation of modified gas pricing, the rate of domestic gas reduced to USD 2.48 per million British thermal unit for first half of 2017-18 (April-September), less than half of USD 5.05 when the formula was first applied in November 2014.
"With the latest marginal fall from USD 2.50 per mmBtu for the second half of 2016-17, the domestic price is now well below the average cost of production for many producers for a sustained period, leading to losses, which has forced the industry to seek a floor price," Icra said in a report.

K Ravichandran, Senior Vice-President and Group Head, Corporate Ratings, Icra, said gas producers will be hit as the business continues to be a loss-making venture for most fields.
"The material appreciation in the Indian rupee against the US dollar, if it sustains, would have a further adverse impact on the gas producers," he said.
The government, he said, has not acceded to the request of the domestic producers for a floor so far, which could be a key bottleneck in achieving a higher share of gas in energy consumption.

"Furthermore, the issue of such low prices for a sustained period making exploration and production unviable, even for benign geologies, would have to be addressed on a priority in order to incentivise domestic production and balance the interest of upstream producers with consumers," Icra said.

Icra further said there is, however, a silver lining in the gas price ceiling for complex new discoveries, which has been increased to USD 5.56 per mmBtu for the first half of 2017-18 from USD 5.30, which could incentivise development of such projects.
From the consumers' perspective, the downward revision in domestic gas prices is a positive sign for user industries.
With a marginal downward revision in the domestic gas price and appreciation in the rupee, the overall cost of domestic gas-based power generation could decline marginally (by about 2 per cent).
Nearly 57 per cent of the gas requirement of the fertiliser sector is met through domestic gas while the remaining is met through imports.

Ravichandran said the revision in the domestic gas price will not impact the pooled prices for the fertiliser sector significantly.
However, the appreciation of the rupee against the dollar will result in lower cost of production for the fertiliser industry, leading to lower subsidy-driven working capital borrowings and lower interest expenses, he said.
According to Icra estimate, for every Rs 1 appreciation against the dollar, the cost of production for urea units reduces by Rs 180-200 per tonne which will enable lower subsidy outgo for the the central government as well.
For the city gas distribution (CGD) sector, while the reduction in gas price is minuscule and on its own may not warrant a cut in CNG and PNG (domestic) prices by the CGD players, when coupled with the exchange rate impact, input cost has undergone a reduction.

"Assuming that the CGD players maintain their current absolute contribution margins in rupee per kg and rupee per standard cubic metre terms, the CGD players could cut CNG price and piped natural gas prices marginally by Rs 0.5-1 per kg and Rs 0.3-0.5 per standard cubic metre, respectively," Icra said.
Despite the reduction in gas prices, a simultaneous reduction in petrol and diesel prices by Rs 3.77 a litre and Rs 2.91 per litre would more than offset the incremental benefit for the end consumer from conversion economics perspective.
"Nonetheless, sufficient competitive advantage exists to keep CNG highly competitive, as evident from a payback period for passenger vehicles at about 6-6.5 months. Further, PNG (domestic) would cost about 10-12% cheaper than unsubsidised LPG in terms of energy cost and thus maintain its competitiveness," it added.