“Depending on the location of the gas field, the cost of production for the upstream players may vary and thus fall in natural gas prices would either stymie their profits or even lead to losses if the cost of production is higher than the realisation cost,” analysts at Care Ratings said while commenting on the impact of the latest gas prices.
The Union government has kept the price of domestic gas unchanged at $1.79 per million British thermal units (mmBtu) as higher production amid lower demand continues to keep global gas prices suppressed. The ceiling price for gas to be produced from difficult fields — which have higher pricing and marketing freedom — has, however, been cut by 10.8% to $3.62/mmBtu. The new prices will be effective for six months starting April 1.
The Centre had slashed domestic gas price by a sharp 25.1% to the current all-time low rate in September, 2020. The domestic gas price is linked to the weighted average price of four global benchmarks (US, UK, Canada and Russia). Spot US LNG prices have risen 2.4% in the last six months to $2.5/mmBtu.
“Depending on the location of the gas field, the cost of production for the upstream players may vary and thus fall in natural gas prices would either stymie their profits or even lead to losses if the cost of production is higher than the realisation cost,” analysts at Care Ratings said while commenting on the impact of the latest gas prices. The average gas output cost of state-run Oil and Natural Gas Corporation (ONGC) — which produces about 80% of the domestic natural gas — is $3.7/mmBtu. ONGC had indicated earlier that it may face a loss of around Rs 7,000 crore in FY21 from its gas businesses. More than 95% of the gas currently produced by ONGC are sold at government determined rates. Analysts at HSBC Securities had pointed that a $1/mmBtu change in the gas price could impact the company’s FY22 earnings by 20%.
“India must move towards market determined pricing mechanism to encourage domestic gas production,” Debasish Mishra, leader energy resources at Deloitte India told FE. The country aims to increase the share of natural gas in its energy mix to 15% by 2030 from the current level of about 6%. Fall in natural gas prices will be positive for the fertiliser and the city gas distribution (CGD) companies. Indigenous natural gas production caters to about only 51% of the country’s requirements. Demand for the natural gas in the domestic market is traditionally dependent on the fertiliser (28%), power (23%), CGD entities (16%), refineries (12%) and petrochemicals industries (8%).
Domestic gas output fell 2.8% y-o-y to 31,168.4 mmscm in FY20, reversing the growth trend recorded since FY18 amid the ageing of existing fields & muted response from the industry to take up new projects.
Production has, however, shown recent signs of revival with the commencement of production from Reliance Industries and BP’s ultra-deep-water field in the KG D6 Block on the east coast of India.