Domestic Natural Gas Price Cut to Hurt Producers' Realisation

The 18% gas price reduction by the Government of India to lower revenues for domestic gas producers by around INR20bn during 2HFY17, estimates India Ratings and Research (Ind-Ra). Domestic natural gas price is cut by around 18%, to USD2.50/mmbtu for the period of 01 October 2016-31 March 2017 from the previous price of USD3.06/mmbtu. The price cut by the government is in line with the fall in Henry Hub gas prices over the reference period (July 2015 to June 2016). Prior to this reduction the government had reduced domestic gas prices by 20% in April 2016.

This is the fourth consecutive domestic gas price reduction since the implementation of the domestic gas pricing formula in October 2014. The present gas prices are about 50% lower since the implementation of the gas pricing formula. The average Henry Hub gas prices declined by 15% to USD2.24/mmbtu for the current reference period of July 2015- June 2016 period compared to USD2.62/mmbtu for previous reference period of January 2015-December 2015.

 

The public sector units, namely Oil India (OIL) and Oil and Natural Gas Corporation (ONGC) which contribute around 75% of the total domestic gas production will be impacted the most. Despite the decline in sale price, lower costs in terms of rig and vessel rentals will provide some relief to margins in this segment. However, the expected fall in margins is likely to result in a lower investment surplus for future exploration. In the mid-stream segment, Gail's (India) ('IND AAA'/Stable) marketing segment can witness around INR9bn-INR10bn lower trading revenue from the sale of domestic gas during 2HFY17 on account of lower per unit realisation. Given that the current price of domestic gas will be close to the marginal cost of production for most players, a further fall in natural gas prices can lead to losses for these players. Ind-Ra notes there is a possibility for a formula revision or setting up of a floor price by the government to protect the domestic producers.

On the positive side, the end-consumers of compressed natural gas (CNG) and piped natural gas (PNG domestic) can benefit from the downward price revision, provided the benefit of lower domestic gas prices are passed on to the consumers. The revised price will translate into City Gas Distribution (CGD) entities lower costs of around INR1.4-INR1.5 per Standard Cubic Metre (SCM) on gas procurement. The PNG prices have been reduced by INR1/scm and CNG by INR1.4/kg in Delhi, post this gas price revision.

During April 2016-September 2016, the price of alternate fuel - diesel - increased by 8%, thus increasing the fuel competitiveness of CNG. Considering that the pricing power lies with the CGD entities, the quantum of benefit passed on to the consumers can vary across CGD entities, depending on their capex plans and investments surplus targeted by them. Analysing the historical price trends, Ind-Ra expects CGD entities to pass on between 40%-70% of the benefit to the end consumers, which is a price cut of around INR0.5/scm-INR1.0/scm in PNG prices and around INR0.7/kg-INR1.4/kg in CNG prices across CGDs.

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