Make free market for local natural gas: ONGC
New Delhi: The government should end all price control over locally-produced natural gas without which it would be hard to develop several fields and raise local output, ONGCNSE -3.73 % chairman Shashi Shanker has said after the domestic gas price slid 26% to record-low of $2.39 per unit, hammering the state-run firm already under pressure from 18-year-low oil prices.“There is an urgent need to revisit the gas price formula and the price ceiling for gas from difficult fields. If we want to really raise domestic production and move towards a gas-based economy, we must permit a free market and do away with the gas price formula,” Shanker told ET.ONGC, which produces about three-fourths of the domestic gas, loses money on producing gas every time local formula price drops below $3.75 per mmBtu. At the current formula price of $2.39 per mmBtu, applicable for April-September period, ONGC would lose on average $1.36 per unit of gas produced. With oil prices dropping to $23 per barrel, ONGC doesn’t quite have the stomach to absorb such losses from its gas business, Shanker said.
“Low prices make unviable many of ONGC’s planned projects, which would break even between $5 and $9 per mmBtu of gas price, and it would be hard for the board to green signal such projects,” Shanker said.“The global gas market has been very dynamic with supply-demand conditions and prices changing rapidly. But our formula fails to capture that as it takes much older international data for future domestic prices,” Shanker said, illustrating his point by saying that the formula price applicable for April-September 2020 is based on average international prices for January-December 2019. “This leaves little room for producers to respond to market conditions and deal with customers.”The formula also provides for an arbitrary deduction of half a dollar from the average of international rates, which again is illogical, he said. “In the US, producers just put unprocessed gas in the trunk pipeline, while we process it incurring additional cost. But we get no reward for that,” he added.The government allows gas from difficult fields to be sold at market rates subject to a price ceiling linked to alternative fuels like coal, fuel oil and liquefied natural gas (LNG). The ceiling has dropped 33% to $5.61 per mmBtu for April-September.“LNG price used to calculate ceiling includes just the spot LNG rate plus freight. This is not a fair comparison as a domestic customer would need to pay customs duty, regasification and transport charges and other domestic duties before using the gas,” Shanker said.ONGC’s output from difficult fields is very small today but expected to grow in the coming years. Spot LNG rates have dropped to record lows of below $3/mmBtu in recent times. This made it hard for ONGC and Reliance-BP to extract good prices for their deep sea gas in recent auctions.