A worker presses a valve that releases oil from a pipe into a bucket at an oil field (Photographer: Taylor Weidman/Bloomberg)

Continuing Gas Price Cuts To Deter Fresh Exploration Capex, India Ratings Says

The ongoing rupee surge coupled with continuing price reductions of gas will push fuel cost down by around 5 percent, which in turn will lower the gross margins of upstream oil and gas players and deter fresh investment into the sector, says a report.

For the fifth consecutive time since implementation of the domestic gas pricing formula in November 2014, the government in March lowered domestic gas prices by 0.8 percent to $2.48 per million British thermal units (mmbtu).

The price will be in force from April 1 to September 30, 2017.

This came even as the average Henry Hub gas prices rose 12 percent y-o-y to $2.52/mmbtu during the same period.

“The latest lowering of domestic gas prices, coupled with the 4 percent rise of the rupee against the greenback in the second half of FY17, will lower the gross margins for upstream players, especially for ONGC and Oil India which contribute around 80 per cent of the domestic production, while their operating cost is around $2.5/mmbtu,” India Ratings said in a note.

The price ceiling for gas produced from discoveries in deep-water, ultra-deep water and high pressure-high temperature areas for the period April-September 2017 is $5.56/mmbtu on gross calorific value basis, while the domestic prices has been lowered to $2.48/mmbtu on gross calorific value basis for this period.

The report further cautioned that “any reduction in the realization from this level will adversely impact their gross margins and will act as a deterrent for fresh investments towards gas exploration and related capex”.

However, it will marginally benefit the midstream entities like Gail (India) Ltd., which will see its trading revenue fall by Rs 250 crore from domestic sales during the first half of FY18.

But since Gail. sells its domestic gases on a cost-plus basis, its gross margins will be protected.

The report also warned that petroleum crack spreads and GRMs will drop in FY18 in the absence of inventory gains, while crack spreads will have a downward bias.

The products crack spread, which is the difference between wholesale petroleum product prices and crude prices, is estimated to remain under pressure in FY18, on the back of the fragile global demand growth amid net capacity additions as Chinese and the US export volumes are likely to remain high helping maintain utilisation levels.

The agency expects the rally in crude prices to fade and price to remain in a narrow range in FY18.