Commodities

Time to re-examine domestic gas price formula

Our Bureaus New Delhi/Mumbai | Updated on October 02, 2020 Published on October 02, 2020

An extremely low price tends to put Indian producers at a disadvantage   -  Getty Images

‘Faulty’ benchmark results in domestic producers operating at a loss, say experts

Questions are being raised on India’s gas pricing formula, after the latest price for local produce announced by the government on Wednesday. This was the third successive cut and the first slash which brought the price below $2 a unit (gas is measured in million British thermal units or mBtu). The Ministry of Petroleum and Natural Gas on Wednesday announced the price of locally produced gas for the next six months from October to March 2021 at $1.79 per mBtu. The price ceiling for natural gas produced from difficult fields (high pressure-high temperature, deepwater and ultra deepwater discoveries) was also cut to $4.06 per mBtu.

Domestic gas producers are producing gas at a loss for the past two-three years because of a faulty benchmark decided by the government, argue industry players, stressing that it is time to relook at the existing formula.

India meets 50-55 per cent of its gas requirement through imports. The prevailing spot price of LNG is $5 per mBtu.

The current formula used for arriving at the domestic gas price is the weighted average price of four global benchmarks: US-based Henry Hub, Canada-based Alberta gas, UK-based NBP and Russia gas. The domestic price is based on the prices of these international benchmarks in the prior year with a quarter’s lag. This distorts the domestic pricing.

Floor price proposal

The government is said to be considering a floor price for gas to shield producers, though there is no clarity on the implementation of the same, said K Ravichandran, Senior Vice-President and Group Head, Corporate Ratings, ICRA. The proposal relies on the Japan Korea mark-up index to act as a floor while calculating domestic gas pricing.

An extremely low price puts Indian producers at a disadvantage and also tightens their purse strings as far as future investments and capex is concerned.

“A reduction in natural gas prices is credit negative for upstream companies such as ONGC and Oil India, as it will lower their revenue from gas sales. Both these companies are already grappling with low oil prices and a further reduction in natural gas prices will exacerbate their earnings decline,” a statement from Moody’s on the gas price reduction said.

Moody’s estimates that ONGC’s full year revenues will decline by ₹1,500-1600 crore while OIL’s will fall by around ₹220 crore in fiscal 2020-2021. ONGC had closed fiscal 2019-2020 with gross revenue of ₹96,213 crore while OIL had reported a ₹13,648.71 crore total income.

Both companies said that natural gas offtake was hit because of industrial slowdown in light of the Covid-19 pandemic and the subsequent lockdowns to curtail its spread.

Some also see this as an opportunity for India to deregulate the gas market.

Also read:

Pressure on trade

The cut in gas prices also puts some pressure on sellers in the newly launched Indian Gas Exchange. Presently, the volumes on IGX are low and largely focussed on trading LNG that has been brought into the country.

Meanwhile, the Petroleum and Natural Gas Regulatory Board has recently come out with the rules for setting up gas exchanges — The Petroleum and Natural Gas Regulatory Board (Gas Exchange) Regulations, 2020. The PNGRB is hopeful of getting requests from the interested players in coming days to run the gas exchange.

Meanwhile, on the consumer side, according to rough estimates that with every dollar increase/decrease in the cost of gas, the cost of gas-based power generation varies by 44 paise a unit. This assessment should also factor in the exchange rate — for depreciation of the rupee against the dollar by ₹1, the cost of generation shows an increase of 5-7 paise per unit.

For consumers of piped natural gas and compressed natural gas, the price cut is a boon. It is expected that city gas distribution companies like Indraprastha Gas Ltd and Mahanagar Gas Ltd would be passing on the benefits of the price cut. Analysts estimate a cut of ₹1-3 per standard cubic m in tandem with the lowering of the natural gas price.

Urea manufacturers are the primary consumers of domestic natural gas in the fertiliser sector by way of the pooled gas mechanism. The current domestic natural gas price reduction is marginally positive with respect to subsidy burden.

With inputs from P Manoj in Mumbai, Twesh Mishra and

Richa Mishra in New Delhi

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on October 02, 2020
  1. Comments will be moderated by The Hindu Business Line editorial team.
  2. Comments that are abusive, personal, incendiary or irrelevant cannot be published.
  3. Please write complete sentences. Do not type comments in all capital letters, or in all lower case letters, or using abbreviated text. (example: u cannot substitute for you, d is not 'the', n is not 'and').
  4. We may remove hyperlinks within comments.
  5. Please use a genuine email ID and provide your name, to avoid rejection.