BQ Survey | India May Cut Domestic Gas Price By Most In Three Years

The government could cut the price to $3.44 per million British thermal units for six months starting Oct. 1, according to the average of 15 estimates from analysts, companies and agencies compiled by BloombergQuint. That’s 7 percent lower than the existing rate, the biggest cut in three years.

Every six months, the price of locally produced gas is calculated based on a formula that factors in the marked-linked prices in the U.S. (Henry Hub), the U.K. (New Balancing Point), Canada (Alberta Gas) and Russia (Russian Natural Gas).

After the administered pricing mechanism was introduced in 2014, gas has turned close to 32 percent cheaper. A lower price could dissuade producers from investment, but will also drive consumption of the cheaper fuel—helping India meet its goals of cutting oil imports and more than doubling the share of gas in the energy mix.

A lower natural gas price reduces the cost of manufacturing urea and petrochemicals—the industries that use the fuel as a feedstock. And it could improve margins of the power sector and the sponge iron industry that uses it for captive power generating units. Consumers, too, stand to gain as prices of gas used as cooking and auto fuel would also fall.

But cheaper gas would decrease ONGC and Oil India’s per share earnings by 5 percent and 3 percent, respectively, according to BloombergQuint calculations, assuming everything else remains same. ONGC and Oil India produce and sell over 80 percent of India’s gas, while the rest comes from private players including Reliance Industries Ltd., Vedanta Ltd., Hindustan Oil Exploration Ltd. and others.

This estimated cut by the government will also take the prices marginally lower than the average cost of production of $3.59 a unit disclosed by ONGC. In its annual report for 2018-19, the company had cited cheaper prices in the domestic market as one of the major risks to the profitability of the gas business. For a company like ONGC where bulk of the production comes from legacy fields and costs rise for every incremental barrel, a low price is a significant disincentive to any major capex programme, it said.