Global Gas Prices Prompt India to Cut Domestic Rates by 18%By and
Domestic price cut to $2.5 per million British thermal units
Gas price cut may hurt cash flows at ONGC, Reliance Industries
India has cut the price of locally-produced natural gas for the fourth consecutive time, tracking a global decline in rates of the fuel.
Domestic gas prices will be cut by 18 percent for the six months beginning October 1 to $2.5 per million British thermal units based on its 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 $3.06 per million Btu for the six months ending today.
The move will dent profits at explorers such as Reliance Industries Ltd. and Oil & Natural Gas Corp., while benefiting city gas distributors and fertilizer producers. It may affect state-owned ONGC’s plans to boost domestic oil and gas output as per Prime Minister Narendra Modi’s target of cutting India’s energy imports by 10 percent by 2022.
“On a reported basis, ONGC will be in loss following the cut in gas price,” Sachin Mehta, an analyst at Centrum Broking Pvt. said, adding that his calculations indicate a pretax loss of about 60 cents per million British thermal units for the gas business. “There will still be cash profit at $0.42 per mBtu."
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 $5.3 per million Btu for natural gas extracted from difficult fields that start production from this year. The cap is effective for the six months to March for fields in ultra-deep areas having high temperature or pressure.
The domestic-price formula needs a floor price to help sustain companies’ capital expenditure, Mehta said.
“It is imperative that government revisits the gas pricing formula to reflect a floor price and a ceiling price on domestic gas,” he said. “More so, since imported gas is still significantly costlier at $4.5-$6 per million Btu.”
Oil Minister Dharmendra Pradhan said Friday that the government will stick to the current formula and there is no plan for setting a floor price.
“When the government decided the formula, all these difficulties were taken into account,” he said in New Delhi.
The price for the domestic gas is now at less than half the price of liquefied natural gas in the Singapore spot market. The weekly spot price for LNG in the island nation was $5.71 per mBtu on Thursday.
In the year ended March 31, India’s domestic natural gas production fell to its lowest since the year ended March 2007. The country produced 31.14 billion cubic meters of gas in the financial year ended 2016, 5 percent lower than output in the previous year. Of the country’s total gas consumption, more than 40 percent is met through imports. India imported 21.31 billion cubic meters of gas in the year ended March 31.