BQ Survey: India Seen Cutting Natural Gas Prices By Most In Six Years

The government could cut gas prices—for the second time in three years—to $2.48 per million British thermal units for six months starting April 1, according to the consensus of 15 estimates from analysts, companies, and agencies compiled by BloombergQuint. That would be a 23 percent reduction—the biggest cut since the nation started announcing administered prices in 2014—and take prices to the level last seen in April-September 2017.

The cut in prices would be a double whammy for ONGC. While it was hardly breaking even on gas, the novel coronavirus outbreak has caused Brent crude—the Asian Benchmark—fall by more than half so far this year, led by a steep slide after talks between OPEC and Russia to cut output broke down and triggered a pricing war. For ONGC, the total cost of production for every barrel of crude is around $35-40 against the prevail market prices of $32-33 a barrel.

Under the government’s new gas pricing rule, the rates of domestically produced gas are revised every six months. Prices were last fixed on Oct. 1, 2019. Domestic natural gas price is determined by a formula that considers the prices of natural gas in U.S. (Henry Hub), U.K. (New Balancing Point), Canada (Alberta Gas) and Russia (Russian Natural Gas). Prices of gas in all these hubs are market-linked.

Since the advent of the new pricing mechanism, gas prices have fallen by close to 51 percent. Lower gas prices might dissuade producers to boost investment and production but could help the country meet its goals of cutting energy imports and more than doubling the share of gas in the energy mix.

Lower natural gas prices also benefit many sectors including:

• Manufacturing of urea and petrochemicals where the fuel is used as a feedstock.
• Reduced prices of compressed natural gas and pressurised natural gas, benefiting consumers.
• Positively impacting margins of the power sector and sponge iron industry, where it’s used to generate energy.

ONGC and Oil India produce and sell close to 80 percent of India’s natural gas, while the remaining comes from private players like Reliance Industries Ltd., Vedanta Ltd., Hindustan Oil Exploration Co. Ltd. among others. A lower gas rate would decrease ONGC and Oil India’s earnings per share by 24.6 percent and 30.7 percent, respectively, according to BloombergQuint calculations, assuming that factors other than the gas-selling rate remains constant.

This will further render ONGC’s business further unprofitable. as it takes the prices of the fuel to levels lower than its average production cost. ONGC has, in fact, been unable to recover production costs even at current gas prices. Its average production cost stands at around $3.59 per million British thermal units.

The company had said in its annual report for 2018-19 that low gas prices in the domestic market is one of its major risks. Every $1 per barrel change in the prices of crude oil, natural gas and other products has an impact of Rs 6,004 crore on ONGC’s revenue, the report said. “For a company like ONGC where bulk of the production comes from legacy fields and production costs rise for every incremental barrel, lower prices are a significant disincentive for any major capital programme,” it said.