Domestic Gas Price to Come Down by 18 Percentage
“In accordance with the ‘New Domestic Natural Gas Pricing Guidelines, 2014 issued by Ministry of Petroleum and Natural Gas, the price of domestic natural gas for the period October 1, 2015 to March 31, 2016 is $3.81 per mmBtu on GCV basis”, the ministry’s Petroleum Planning and Analysis Cell said. This takes the price back to the level it was before the new policy came into effect. The average Henry Hub gas prices declined to $3.33/mmbtu from $4.35/mmbtu over January-December 2014. The problem with ultra-low prices, as is the case now, is that they put off investment decisions that will make a difference to future output.
Lower gas prices will benefit IGL’s CNG and domestic PNG business (~83% of its volumes)”. As such, Indian prices are not exactly the same as those in any one market. It will be a double whammy for ONGC and OIL which have already been hit by the fall in crude oil prices. According to India Ratings and Research, the benefit from reduced prices will be partly offset by the near 6% depreciation of the rupee over April-September 2015.
“The city gas distribution (CGD) companies will gain the most as the segment gets 100 per cent allocation of cheap domestic gas, which will enhance CGD margins”. Volumes will be driven by competitiveness of CNG versus petrol/diesel and convenience of usage of PNG in domestic households.
Shares of IGL rose 3.70% to Rs.478.05 while those of GGL rose 2.76% to Rs.519.10 on Wednesday.
The reduction, the steepest ever, will hit producers like state-owned Oil and Natural Gas Corp (ONGC) as well as central government whose earnings from royalty and income tax will dip by about Rs 800 crore during the remainder of the fiscal, according to industry estimates. Following the introduction of the formula, the prices went up by a third but fell about 8% in the first revision in April.
The new price would not impact Reliance Industries (RIL) as the price the company is allowed to charge from its gas reservoirs in the Eastern offshore KG-D6 block is capped at $4.2 per mmbtu, pending the resolution of arbitration over cost recovery on account of shortfall in production from D1 and D3 discoveries. The move will be a revenue loss for upstream oil companies like ONGC and Reliance Industries.