India Approves Higher Gas Prices in Boost to Reliance, ONGC
India’s cabinet agreed to increase the price of natural gas as it seeks to augment exploration of the clean-burning fuel. The decision will benefit Reliance Industries Ltd. (RIL) and Oil & Natural Gas Corp. (ONGC)
The cabinet approved a pricing formula recommended in December by a panel led by Chakravarthy Rangarajan, chief of the prime minister’s Economic Advisory Council, Oil Minister Veerappa Moily told reporters in New Delhi yesterday. Prices will double to $8.4 per million British thermal unit from $4.2 per million Btu starting April 2014, Press Trust of India reported, citing an official it didn’t identify. A briefing on the decision and other steps endorsed by the cabinet will be held today.
Reliance, controlled by India’s richest man Mukesh Ambani, and partner BP Plc (BP/) have been seeking higher prices of natural gas even as production from their field in India, the nation’s biggest, has slumped in the past three years. The drop in output and aging ONGC fields has forced the country to import expensive gas that’s contributed to a widening current account deficit and driving the rupee to a record low.
“This will encourage more investments in exploration and make smaller pools of gas economically viable to produce,” said Neelabh Sharma, a Mumbai-based analyst at BOB Capital Markets Ltd. “Higher gas price will also increase cost of power generation and fertilizer production and the government will have to take care of that.”
Reliance’s shares climbed 3.3 percent to 830 rupees and ONGC gained 3.8 percent to 320.25 rupees in Mumbai yesterday. Oil India Ltd. (OINL), which also produces the fuel from fields in northeastern India, rose 1.9 percent to 572.15 rupees. The benchmark S&P BSE Sensex (SENSEX) advanced 1.8 percent.
Every $1 increase in the price of gas will make as much as 10 trillion cubic feet of natural gas economically viable to produce, Sharma said. India had 47 trillion cubic feet of proven gas reserves at the end of 2012, according to BP data.
Reliance has been selling gas from the KG-D6 block off India’s east coast at $4.2 per million British thermal units since it started production in April 2009. The government more than doubled ONGC and Oil India’s selling price to $4.2 per million Btu in May 2010.
A panel led by Rangarajan recommended rates in India should be an average of gas prices in the U.S., U.K. and import rates in Japan and India.
Output from the KG-D6 block slid more than 75 percent since 2010 as the reserves proved geologically difficult to recover. Prime Minister Manmohan Singh is seeking to boost energy exploration and production and cut an import bill that widened the current account deficit to a record in the three months ended Dec. 31. The deficit narrowed to $18.1 billion in January through March, compared with $31.9 billion in the preceding three months, the Reserve Bank of India said yesterday.
The rupee has dropped 8.7 percent in 2013, the most after the Japanese yen among 11 major Asian currencies tracked by Bloomberg. It slumped to a record 60.7650 per dollar on June 26.
The government needs to allow higher selling prices to encourage explorers to produce more, said R.S. Sharma, chairman of the Federation of India Chambers of Commerce and Industry’s Hydrocarbon Committee and a former chairman of ONGC.
State-run ONGC, which found reserves adjacent to Reliance’s fields in the Bay of Bengal six years ago, has said deepwater drilling is not viable at current prices. Gujarat State Petroleum Corp. (GSPC), an explorer controlled by the Gujarat state government, is also developing a field in the area.
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