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Natural gas production loss-making after gas price cut: Rating agencies

Natural gas production in India remains a loss-making proposition for most fields after the government cut gas price by a steep 25 per cent, rating agencies said

Natural gas price | natural gas

Press Trust of India  |  New Delhi 

Natural gas

production in India remains a loss-making proposition for most fields after the government cut gas price by a steep 25 per cent, rating agencies said on Thursday.

The reduction in gas price to USD 1.79 per metric million British thermal unit (mmBtu) from USD 2.39 "is credit negative for upstream companies such as Oil and Corporation (ONGC) and Oil India Ltd (OIL) as it will lower their revenue from gas sales", Moody's Investors Service said.

Both these companies are already grappling with low oil prices and a further reduction in prices will exacerbate their earnings decline, it said adding that gas sales account for around 18-19 per cent of the companies'upstream revenues.

The reduction in rates effective October 1 is the third straight reduction in gas prices in India over the past 12 months and is the lowest in over a decade.

"We estimate ONGC's revenues and Ebitda to decline by Rs 1,500-1,600 crore on account of lower gas prices," Moody's said. "ONGC's credit metrics have sufficient capacity to withstand the decline in gas prices and remain supportive of its baa3 baseline credit assessment (BCA) and Baa3 ratings." Ebitda stands for earnings before interest, tax, depreciation and amortisation.

In comparison, reduction in gas prices will lower OIL's revenue and Ebitda by around Rs 220 crore and the decline is equal to around 2.5 per cent of the company's expected consolidated revenue and around 8 per cent of consolidated Ebitda for the fiscal year ending March 31, 2021.

"We expect OIL's credit metrics to remain weakly positioned relative to baa3 BCA for fiscal 2021, but to improve and come back within its ratings thresholds by fiscal 2022 as oil prices start to recover," it added.

ICRA said the government has additionally announced a 27.6 per cent reduction in the ceiling on the price for gas produced from deep water, ultra deep-water, high temperature and high-pressure fields to USD 4.06 per mmBtu, which would dampen the development of such projects.

K Ravichandran, senior vice-president and group head (corporate ratings) at ICRA, said, "At such low gas prices, gas production remains loss-making proposition for most fields for the Indian upstream producers notwithstanding some decline in oil field services/equipment costs."

Also, the appreciation of the Indian rupee against the US dollar in the past few months further dampens the realisations of the gas producers.

"Going forward, the supply glut is expected to keep prices of domestic gas low in the near-to-medium term leading to poor returns even as domestic gas producers such as ONGC and Reliance Industries-BP ramp up gas production significantly," he said.

The sharp decline in domestic gas prices comes at a time when the upstream sector is grappling with low oil prices.

"Accordingly, the double whammy of low crude oil and natural gas prices is negative for the upstream sector impacting their revenues, profitability and cash accruals," he said.

From the consumers' perspective, the decline in domestic gas prices is positive.

ICRA said the downward revision in the domestic gas price would lower the fuel cost of domestic gas-based power generation by about 20 per cent.

For every USD 1 per mmBtu decline in gas price, the cost of generation would reduce by 60-65 paise per unit for gas-based power generation projects at the prevailing rupee-dollar exchange rate.

For the fertiliser sector, nearly 41 per cent of the gas requirement of the fertiliser sector is met through domestic gas and lower gas prices would help save Rs 11,000 crore, ICRA said.

As regards the impact on the city gas distribution (CGD) sector, Ankit Patel, vice-president and co-head at corporate ratings at ICRA, said the reduction could lead to a cut in CNG price and piped natural gas prices by Rs 2.2-2.4 per kg and Rs 1.5-1.7 per cubic metres, respectively.

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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First Published: Thu, October 01 2020. 16:54 IST