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India Cuts Domestic Gas Price By 18%; May Hurt Oil Explorers Like RIL, ONGC

ONGC, RIL and Oil India will be the worst hit by the gas price revision.



Gas pipeline. (Photographer: Luke Sharrett/Bloomberg)
Gas pipeline. (Photographer: Luke Sharrett/Bloomberg)

India cut domestic gas price for the fourth consecutive time on Friday. The ministry of petroleum and natural gas cut the price of domestically-produced natural gas to $2.50 per million British thermal units (mmbtu) for the six months beginning October 1 versus $3.06/mmbtu earlier, according to a statement on its website.

The government also revised the ceiling price for 'difficult' (Deepwater, ultradeepwater, high temperature and high pressure) gas discoveries to $5.30/mmbtu for the next six months. Earlier this price was fixed at $6.61/mmbtu for the last six months ending Friday.

Governed by the Modified Rangarajan Formula, India’s domestic gas price is a volume-linked weighted average of gas prices prevailing in multiple global markets. The volume-linked weightage for a certain price is based on the market’s familiarity to India’s import-assisted natural gas economy. Essentially, the government tries to balance the price of natural gas in India to reflect a favourable price for a market that has substantial production as well as import dependence.

Upstream oil companies such as Oil and Natural Gas Corporation Ltd., Reliance Industries Ltd., and Oil India Ltd. will be the worst hit by the gas price revision.

ONGC had, therefore, requested the government to revise domestic gas pricing formula, chairman DK Sarraf told BloombergQuint on September 8.

We expect the gas price to go down further by 20 percent from $3.06/mmbtu to $2.5/mmbtu or somewhat lower than that after the gas price revision of October 1, 2016. We have asked the government to relook into the gas price formula as this does not leave us any money to carry out more projects.
DK Sarraf, Chairman, ONGC on September 8

ONGC’s revenue will be stressed on account of the gas price revision, Saraf had added, “The price of domestically-produced gas was $5.02/mmbtu, it came down to $4.66/mmbtu, $3.82/mmbtu and then to $3.06/mmbtu in subsequent revisions. Every dollar decrease in gas price affects ONGC’s revenue by Rs 4,200 crore.”