New gas pricing formula: Short-term pain, long-term gain for ONGC and OIL

The Centre has recently approved the natural gas pricing formula recommended by Kirit Parikh committee.

Last year, the Kirit Parikh-led panel submitted its report to the government on rationalisation of gas prices from old fields, NELP and pre-NELP blocks, with a formula-based pricing approach.

New gas pricing formula

According to the new formula, the price of locally produced gas will be fixed at 10 per cent of the trailing one month’s crude basket price for India. For APM gas (administered pricing mechanism gas) by ONGC and Oil India, a floor price of $4/mmbtu and ceiling price of $6.5/mmbtu have been fixed. APM gas price is currently at $8.57 per mmbtu and the current crude basket price for India is around $85 a barrel.

The new pricing guidelines will be effective from April 08, 2023. Notably, the current prices are higher than the ceiling price. The floor and ceiling prices will be revised by 25 cents every two years.  

Clean fuel not just economically gainful, but also socially pertinent: Kirit Parikh  Clean fuel not just economically gainful, but also socially pertinent: Kirit Parikh  

For gas from other new fields, the price has been fixed at a 20 per cent premium over the APM gas price.

Impact on ONGC and OIL

After a record performance of gas divisions in Q3 FY23, the overall profitability of ONGC and Oil India is expected to moderate over the short-term due to a downward revision in the APM gas prices under the new gas pricing regime.

For instance, Oil India’s gas segment posted an operating profit of ₹1,091 crore (on a revenue of ₹1,660 crore) in the October-December 2022 period. This is a whopping 65 per cent margin for the company, compared with a loss of ₹107 crore (on a revenue of ₹514 crore) for the October-December 2021 period. This is thanks to the high gas realisation of $8.6 per mmbtu in Q3 FY23 against $2.9 per mmbtu in Q3 FY22.

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We expect that the floor price of $4 per mmbtu will ensure the stability of the gas segments of both ONGC and OIL India, benefitting them over the long-term. This could be a reason why stocks of ONGC and Oil India are up 2-3 per cent in trading today.

After a steep rise in Q3 FY23, profitability of city gas distribution companies (CGD companies) can see a bump up in the current quarter as the APM gas prices moderate.

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However, with the revision in the pricing formula, CGD companies will be able to fork out a long-term pricing strategy to ensure that they are profitable despite a rise in the prices of crude oil. Otherwise, they have to improve volumes by purchasing higher priced gas from new wells.

With crude prices hitting new benchmark, the new gas pricing norms will stabilise the prices of gas, at least for domestic gas, and will be positive for gas users such as fertilisers as it will help prune their working capital needs.

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