RIL, ONGC face 18% cut in natural gas price

The cut in natural gas price could put pressure on the margins of ONGC and RIL, while benefiting users including fertilizer companies and power generators


Such a reduction would take the price to less than half the $5.05 per million British thermal units the government set when it first rolled out the formula in 2014. Photo: Reuters
Such a reduction would take the price to less than half the $5.05 per million British thermal units the government set when it first rolled out the formula in 2014. Photo: Reuters

New Delhi/Mumbai: India will probably cut the price of natural gas by about 18% in a setback for explorers, a survey by Bloomberg News shows.

The government-set price will track a global decline and fall to less than $2.5 per million British thermal units for October through March from $3.06 currently, according to the average of 12 industry estimates. India reviews the rate half-yearly, using a formula capturing international trends. The announcement is due this week.

Such a reduction would take the price to less than half the $5.05 per million British thermal units the government set when it first rolled out the formula in 2014. That could put pressure on the margins of explorers such as Oil & Natural Gas Corp. and billionaire Mukesh Ambani’s Reliance Industries Ltd, while benefiting users including fertilizer companies and power generators.

“We’re highly concerned about the fall in prices,” said Ashu Sagar, the secretary general at the Association of Oil & Gas Operators, whose members include the biggest explorers and gas producers. “The formula now doesn’t offer any floor.”

India has struggled to follow the US and Europe in giving natural gas a greater role for electricity production in place of polluting coal power. Lower prices threaten to hamper the investment needed to turn around flagging output of the fuel in Asia’s third largest economy.

“The government needs to encourage domestic production by ensuring a fair minimum price,” said Sachin Mehta, an analyst at Centrum Broking Pvt. in Mumbai.

A higher tariff of about $6.6 per million British thermal units is available for gas recovered from some deep-sea fields, under a policy change from March that prompted companies to revive plans to tap difficult deposits. That price is also due to be revised from 1 October.

“Gas prices are determined by an approved formula linked to some international market rates—if prices of those markets have fallen, it will reflect on domestic prices,” oil secretary Kapil Dev Tripathi said 21 September.

Tushar Pania, a spokesman for Reliance Industries, didn’t respond to an e-mail seeking comment on the upcoming revision of gas prices.

State-run ONGC, the biggest explorer in India, estimates that each dollar decrease in gas prices curtails annual revenue by Rs.4,200 crore and profit by Rs.2,400 crore.

ONGC chairman Dinesh Kumar Sarraf said the government may step in if parts of the exploration industry become unviable because the natural gas price falls too far.

“We’re fully confident that if certain things are not viable, the government would help the industry and us,” Sarraf said in an interview, citing the step earlier this year to allow higher prices for deep-sea fields as an example.

The current gas-price formula is based on US, Canadian, UK and Russian rates. Sagar from the trade association said the government needs to reassess the formula as it’s based on prices from countries where there is an oversupply of gas, unlike in India. Bloomberg

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