Reliance, ONGC Slump After India Defers Gas Tariff Increase

Reliance Industries Ltd. and state-run Oil & Natural Gas Corp., India’s biggest natural gas producers, plunged in Mumbai after India’s cabinet deferred a move to increase natural gas prices by three months.

Reliance dropped 3.7 percent to 1,011.90 rupees, the biggest decline since Sept. 3, and ONGC fell 5.8 percent to 411.35 rupees, the steepest drop in 10 months. Oil India Ltd. fell 2.8 percent and the benchmark S&P BSE Sensex lost 1 percent. Canada’s Niko Resources Ltd., which owns a 10 percent stake in Reliance’s biggest gas field, slumped 11 percent in Toronto yesterday.

The gas price issue requires “comprehensive consultations,” Oil Minister Dharmendra Pradhan said yesterday in New Delhi. The previous administration had approved a formula for almost doubling prices from the current $4.2 per million British thermal units, which was postponed from its scheduled date of April 1 because of federal elections.

“The deferment will be a setback for explorers,” said Dhaval Joshi, a Mumbai-based analyst at Emkay Global Financial Services Ltd., who has an accumulate rating for Reliance and a buy rating for ONGC. “The decision for a detailed review is justifiable as the government wants to take a holistic view after assessing the full impact on the economy.”

Modi’s Dilemma

India’s Prime Minister Narendra Modi faces a dilemma as he tries to balance the demands of explorers to raise gas prices and boost exploration with the need to stem inflation. Higher gas prices would increase the expense of running power and fertilizer plants, raising infrastructure and food costs and accelerating inflation that’s the second-highest in Asia.

Reliance and partner BP Plc have been seeking higher prices of natural gas. India’s offshore oil and gas industry is “at risk” in the absence of higher gas prices, BP’s Chief Executive Officer Robert Dudley said in Moscow on June 17.

Output from Reliance’s KG-D6 block has slid since 2010 as the reserves proved geologically difficult to recover, Reliance said April 18. Last month, the company served an arbitration notice to the government to raise prices.

Reliance has been selling gas from the block at the same price since it started production in April 2009. The government increased ONGC and Oil India’s selling price to match Reliance’s in May 2010.

Pricing Formula

A panel led by Chakravarthy Rangarajan, economic adviser to former Prime Minister Manmohan Singh, had worked out a pricing formula that averaged gas prices in the U.S., the U.K. and import rates in Japan and India. This would have increased prices to more than $8 per million Btu.

In March, India’s election panel directed the oil ministry to defer the increase till the end of federal elections. Modi and his Bharatiya Janata Party won the polls last month with the biggest victory margin in 30 years. He promised to boost growth and control inflation. Consumer prices in India accelerated by 8.28 percent in May, the highest in Asia after Pakistan, according to data compiled by Bloomberg.

Each dollar increase in gas prices will raise ONGC’s annual revenue by 40 billion rupees, Chairman D.K. Sarraf said on March 25. For every $1 increase in gas prices and at a production rate of 15 million cubic meters a day, Reliance’s earnings per share will gain 1.5 percent in the year that began April 1, Mumbai-based IIFL Holdings Ltd. has estimated.

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