Gas price cut on the cards in the Indian market

Gas price cut on the cards in the Indian market

Natural gas prices are likely to fall below $4 per mmBtu (million metric British thermal units) from next month, impacting profits of explorers such as ONGC and Reliance Industries and curbing investments at a time the country is struggling to stem a drop in output.

The new price, to be effective from October, is likely to be announced this week. The price could drop to a low of about $3.8 or $3.9 per mmBtu from $4.66 on the basis of gross calorific value (GCV), according to oil ministry estimates.

However, the price cut will benefit power producers and fertiliser manufacturers apart from the government, which subsidises fertiliser to keep it affordable to farmers.

ONGC officials had indicated that each $1 increase in the price of gas boosts the PSU’s annual profit by Rs 2,350 crore.

This will be second reduction in rates after April.

“Preliminary calculations based on average price in the gas hubs stated in the formula indicate that the rate from October 1 is likely to be $4.16 or $4.17 per mmBtu on NCV basis,” oil ministry officials said. On GCV basis, the rate will be about $3.8 per mmBtu compared with $4.66 now.

The price will be calculated on the volume weighted average of rates in Henry Hub in the US and National Balancing Point (NBP) in the UK, Alberta Hub of Canada and Russian gas prices based on the twelve-month trailing average price with a lag of three months.

While Henry Hub has a weight of 38.1 per cent in the formula, NBP accounts for 42.9 per cent, Alberta Hub Canada 4.9 per cent and Russian gas 14.1 per cent.

Europe and Russia jointly have 57 per cent weight in pricing and a steep decline in these two regions will substantially influence domestic prices.

Analysts expect the rates to be lower than that announced in March because of a fall in the price of global crude and liquefied natural gas at the crucial hubs.

“Domestic gas prices would decline to around $4 mmBtu because of subdued global demand and crude prices. A shale production boom in the US, a slide in Russia’s rouble and a tumble in crude oil, a common index for gas rates, have depressed prices,” they said.

Domestic gas output could be further impacted by a decline in prices. Gas production fell to a four-year low of 33.7 billion cubic meters in the 12 months through March 31, according to the oil ministry. Output from RIL’s KG-D6 block fell 13 per cent to 37 billion cubic feet in April-June.

Production during April-July, 2015 stood at 10863.821 million metric standard cubic metres (mmscm), which is 4.88 per cent lower than the target and 4.26 per cent lower than the output during the corresponding period last year.

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