No change in gas pricing formula; rates below output cost

Rating agency Fitch said while the lower gas prices will not significantly hurt the borrowing capacity of Oil India Ltd, it will be selling natural gas at a loss


The rate compares to average cost of production of about $3.59 per mmBtu for ONGC and $3.06 for OIL, without taking into account return on capital. Photo: Bloomberg
The rate compares to average cost of production of about $3.59 per mmBtu for ONGC and $3.06 for OIL, without taking into account return on capital. Photo: Bloomberg

New Delhi:Government on Wednesday ruled out changes in the formula for pricing of domestic natural gas even though the formulation has driven down rates below the production cost.

The NDA-government had in October 2014 fixed a formula based on rates prevalent in gas-surplus economies of US/ Mexico, Canada and Russia to price gas produced in a import dependent economy. As rates slumped in the near stagnant gas-surplus economies, rates were cut for four consecutive times, the last being on 1 October to $2.5 per million British thermal unit. “The formula approved in October 2014 stands...There will be no changes in that,” oil minister Dharmendra Pradhan said.

He was asked if the government was looking at changes in the formula by looking at demands for a floor or minimum price for producers like Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL) who are making losses at current rates. “That formula stands,” he said categorically.

While originally the formula was to apply to all the existing as well as future production, the government earlier this year made some course correction to allow limited pricing freedom to yet-to-be-produced gas from difficult areas like deepsea or high-pressure-high-temperature fields. Gas produced from difficult fields was allowed a rate capped to maximum price of alternate fuel. This rate for six months beginning 1 October was fixed at $5.3 per mmBtu.

Rating agency Fitch in a note on Wednesday said while the lower gas prices will not significantly hurt the borrowing capacity of Oil India Ltd, it will be selling natural gas at a loss. Price of natural gas produced by Oil and Natural Gas Corp. (ONGC), OIL and Reliance Industries locally was cut by 18% to $2.5 per million British thermal unit (mmBtu) based on its gross heat value for 6-month period from 1 October.

On net heat value basis, the price will be $2.78. The rate compares to average cost of production of about $3.59 per mmBtu for ONGC and $3.06 for OIL, without taking into account return on capital.

As per a new mechanism approved by the government in October 2014, the price of domestically produced natural gas is to be revised every six months—1 April and 1 October—using weighted average or rates prevalent in gas-surplus economies of US/Mexico, Canada and Russia. From 1 October 2016 to 31 March 2017, the rate has been fixed at $2.5 per mmBtu compared to $3.06 per mmBtu previously. The price of gas between 1 October 2015 and 31 March 2016 was $3.81 per mmBtu and $4.66 in the prior six-month period. Next change is due on 1 April.

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