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India’s revised gas pricing formula to aid demand, upstream profit stability: Fitch
India has revised the APM formula for legacy fields allocated to ONGC and OIL on a nomination basis. Prices for the next month will be 10% of the imported Indian crude basket
New Delhi: India’s decision to limit prices of domestic natural gas from legacy fields to between $4 per million British Thermal Unit (mmbtu) and $6.5 will support margins for city gas distributors, encourage the use of gas, and reduce cash flow volatility for upstream producers, Fitch Ratings said on Wednesday.
“We expect a partial pass-through of the lower administered price mechanism (APM) gas prices, at which domestic upstream producers supply gas to city gas distributors, in the prices of compressed natural gas (CNG) and domestic piped natural gas (PNG) to add to the distributors‘ margins in the near term,” it said.
According to the rating agency, the APM price under the new regime was calculated at $7.92, but is capped at $6.5 for the rest of April, 24% below levels seen in October 2022-March 2023. Following the change, Mahanagar Gas Ltd, a city gas distributor, announced a 9% reduction in domestic PNG and CNG prices.
“We expect such price cuts by city gas distributors and the fixing of a price ceiling to add certainty to domestic natural gas’ price advantage relative to alternative fuels, supporting gas usage for transportation and households, and overall demand in the medium term,” Fitch said.
The revised mechanism dovetails with India’s target of increasing the share of natural gas in its energy mix. Fitch in January 2023 highlighted price volatility as a key demand risk, it added.
According to the rating agency, stronger and less volatile gas demand will be positive for GAIL (India) Ltd’s gas transmission segment.
Fitch expect the price floor and ceiling to reduce volatility in cash flows from gas production for Oil India Ltd and Oil and Natural Gas Corp Ltd.
“The floor is higher than APM prices over 2015 to 2021 while the ceiling is below current market prices. Gas sales accounted for 9%-11% of OIL’s and ONGC’s standalone revenues in the financial year ended March 2022 (FY22), and the legacy fields account for the majority of their gas production. Financial buffers built by OIL and ONGC over the last 18 months, when industry conditions were favourable, will help them to absorb the near-term reduction in APM prices,” it said.
“We also expect the cut in gas prices to ease inflationary pressure in the economy, with domestic gas accounting for 55% of India’s gas consumption in 9MFY23,” it added.
India has revised the APM formula for legacy fields allocated to ONGC and OIL on a nomination basis. Prices for the next month will be 10% of the imported Indian crude basket, reflecting the average between the 26th day of the prior month and 25th day of the current month, and be declared on the current month’s last day, subject to the floor and ceiling. The changes followed submission of the Kirit Parikh committee’s recommendations in November 2022, when domestic gas prices under the previous mechanism were at a record high.
The pricing formula for deep-water, high-pressure, high-temperature fields is unchanged and set at $12.12 for April-September 2023 ($12.46 for October 2022-March 2023), which we believe maintains the incentives for upstream producers like ONGC and Reliance Industries Limited to continue developing such fields.
Prices of gas produced from new well or well intervention in legacy fields, which are subject to the floor and ceiling, are allowed a premium of 20% on APM prices, and this gas will be allocated to customers for five years.
APM prices will also apply to production-sharing contracts of the New Exploration Licensing Policy (NELP) or Pre-NELP blocks where the government’s approval of prices is required, but the floor and ceiling will not apply.
The revised mechanism will maintain the price ceiling over FY24 and FY25, and allow an annual increase in the price ceiling thereafter of $0.25. It does not include any explicit timelines for liberalisation of prices.
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Business NewsIndustryEnergyIndia’s revised gas pricing formula to aid demand, upstream profit stability: Fitch
First Published:12 Apr 2023, 01:52 PM IST
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