Parikh panel moots lower price band for APM gas; pricing freedom from 2027

The Kirit Parikh panel to review natural gas prices in India has recommended a price band of $4-6.50/unit for gas from old legacy fields, which account for over 70% of the domestic output, and ushering in of fully market-determined rates by January 2027. It proposed price escalation for the old fields, with an increase of $0.5 per metric million British thermal unit (mmBtu) annually with no change in pricing for the first two years or a $0.25 per mmBtu annually escalation for five years.

If the recommendations are implemented, state-run ONGC and OIL will have to reduce prices from the current record level of $8.57/mmbtu and this, in turn, will help improve the margins of city gas companies like IGL, MGL and Gujarat Gas. Prices of CNG and piped cooking gas have shot up by 70% in the last one year, on the back of a surge in input costs.

Producers of gas from legacy fields — ONGC and OIL — stand to lose around Rs 23,000 crore in FY24, if the panel’s proposals are implemented, according to CareEdge Ratings.

The panel has suggested linking the price of gas produced by state-owned firms from fields given to them on a nomination basis to imported crude oil prices rather than benchmarking them to gas rates in the international markets, Parikh said, after submitting the report to the ministry of petroleum and natural gas on Wednesday.

Importantly, the panel did not favour any change in the existing pricing formula for “difficult fields” such as KG-D6 of Reliance Industries and bp. Gas from these fields is currently being sold at a record $12.46 (for October 2022-March 2023 period). This is a big positive for the RIL-bp combine as well as ONGC, which too has assets in the difficult geologies.

The panel also suggested including natural gas in GST by subsuming excise duty charged by the Centre and varying rates of VAT levied by state governments.

The Parikh panel, analysts said, sought to strike a fine balance between its twin mandates of suggesting a “fair price to the end-consumer” in the wake of the sharp spike in global prices of gas (local prices are linked to these) and bringing in “a market-oriented, transparent and reliable pricing regime” that will incentivise domestic production.

“If prices get revised to $6.5/mmbtu, the gas sourcing costs (for city gas companies) would decline by $2/mmBtu. This would improve their margins and would also likely lower the CNG and domestic PNG sales price,” ICICI Research stated. Gas from the old fields is sold to city gas distribution (CGD) companies for the priority sector (CNG and domestic PNG) needs. Priority sector contributes around 80% and 86% to the volume mix of IGL and MGL, respectively. For Gujarat Gas, this is around 35%. “Hence, IGL and MGL are likely to benefit to a greater extent than Gujarat Gas if the price revision goes ahead as planned,” it added.

The government had hiked prices of domestically-produced natural gas from normal and difficult fields by 40% and 26% respectively for the October 2022-March 2023 period, a move that made gas-based electricity, CNG and piped natural gas costlier, but boosted the profitability of producers like Reliance Industries and state-run ONGC and OIL.

Though the input cost of fertiliser companies also rose as a result of the government’s move, farmers have been insulated from the impact, thanks to the open-ended subsidies on urea. However, the margins of CGD companies like Indraprastha GasMahanagar Gas and Gujarat Gas came under pressure.The hike for the H2FY23 period came on the back of 110% hike in prices announced six months ago for the April-September 2022 period.

RIL’s gas production from KG-D6 field is expected to rise to 27-28 million metric standard cubic metres per day (mmscmd) by FY24 from 18 mmscmd at present. RIL has been asking for removal of the ceiling prices on gas. The company’s MJ field in the KG basin will likely go on stream by the third quarter of this fiscal.

Higher realisation for difficult fields will encourage RIL and ONGC to fast-track their deep-water production schedules. Despite the steep hike in prices in April, domestic gas prices have been lower than landed LNG prices. Of the total gas consumed in the country, almost 50% is imported LNG.

The volume-weighted average of the price prevalent in a 12-month period in US-based Henry Hub, Canada-based Alberta gas, UK-based NBP and Russia gas is currently being used to fix prices for administered fields of ONGC and Oil India.

For difficult fields like discoveries in deepwater, ultra-deepwater and high pressure-high temperature areas, a slightly modified formula is used by incorporating the price of LNG.

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