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India Cuts Domestic Gas Prices 20% Amid Falling Global Rates

  • Gas price cut may hurt cash flows at ONGC, Reliance Industries
  • Domestic price cut to $3.06 per million British thermal units

India cut the price of locally produced natural gas by 20 percent for the six months beginning April 1 in line with the fall in global prices.

Domestic gas prices will be cut to $3.06 per million British thermal units based on the gross heat value, the oil ministry’s Petroleum Planning and Analysis Cell said in a statement on its website. The government had fixed the price at $3.82 per million Btu for the previous six-month period. This is the third straight cut since April 2015.

The move will dent cash flows at explorers such as Reliance Industries Ltd. and state-owned Oil & Natural Gas Corp. It may also affect spending plans at ONGC, which this week approved a $5.07 billion development in the Bay of Bengal off the country’s east coast. The New Delhi-based company is seeking to maintain its exploration activities in spite of the collapse in oil, while shrinking costs are allowing it to spend less.

“For ONGC, onshore and offshore put together, $3.10 to $3.20 is the break even point after they pay taxes and royalty,” said Sachin Mehta, oil and gas analyst at Centrum Broking Pvt. The new price “leaves very little for them,” he said.

India sets gas prices using a formula based on U.S., Canadian, U.K. and Russian rates. The government also announced a ceiling price of $6.61 per million Btu for natural gas extracted from deepsea fields that start production from this year. The cap is effective for the six months to September.

Every $1 reduction in gas prices leads to a decline of 40 billion rupees in ONGC’s revenue on an annual basis, said Director, Finance A.K. Srinivasan.

“Extrapolating from that, the impact will be around 15 billion to 16 billion rupees” for the six months to September, he said.

The reduction comes weeks after the government announced a new policy on gas from deep-water fields, giving companies a higher price and marketing freedom. That price is linked to four alternate fuels -- liquefied natural gas, fuel oil, naphtha and imported coal.

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