• Reduction may squeeze profit margins at ONGC, Reliance
  • City gas and fertilizer firms to benefit from low prices

India reduced the price of locally produced natural gas by 18 percent for six months beginning Oct. 1, hurting producers including Oil & Natural Gas Corp., Oil India Ltd. and Reliance Industries Ltd.

The price will be cut to $3.82 per million British thermal units based on the gross heat value, according to the oil ministry’s Petroleum Planning and Analysis Cell. Rates were fixed at $4.66 per million Btu for the last six months. The price based on the net heat value will be $4.24, an oil ministry official, who asked not to be identified because of rules, told reporters on Wednesday in New Delhi.

The reduction will squeeze profit margins at explorers such as Reliance Industries and state-owned ONGC, while benefiting power producers and fertilizer makers. Low prices may deter exploration companies from investing and increasing output, essential for Prime Minister Narendra Modi’s target of cutting India’s dependence on imported energy to 50 percent by 2030 from 80 percent now.

“The gas prices may remain muted at these levels in the near future unless there are sharp changes in global benchmark prices,” Deepak Pareek, an analyst at Sunidhi Securities & Finance Ltd., said by phone in Mumbai. “The drop will benefit city gas distribution companies and also retail consumers, who may have to pay less. Lower prices were expected and factored into the stock prices of the biggest producers like ONGC.”

Shares of Indraprastha Gas Ltd., a city gas distributor, rose as much as 8.3 percent to 498.70 rupees, the most since July 1, and traded at 485.85 rupees as of 12:12 p.m. in Mumbai. Rival Gujarat State Petronet Ltd., which serves consumers in the western state of Gujarat, rose as much as 3.2 percent. Gas producers ONGC and Oil India fell as much as 1.9 percent and 3.6 percent respectively, while Reliance rose 1.2 percent.

In May 2010, India had set the price of gas produced from fields awarded to ONGC and state explorer Oil India Ltd. at $4.2 per million Btu, based on net calorific value, matching the rate fixed for Reliance’s fields in the Krishna-Godavari basin in September 2007.

India reviews the price of gas half-yearly, using a formula capturing international trends. The gas-price formula is based on U.S., Canadian, U.K. and Russian rates. A shale production boom in the U.S., a slide in Russia’s ruble and a tumble in crude oil, a common index for gas rates, have depressed prices. Natural gas futures on the New York Mercantile Exchange have dropped about 37 percent in the past year.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE