Brokerages Expect New Gas Price Discovery Norms To Boost Investments

Analysts expect the new price-discovery mechanism for marketing natural gas will draw investments.

The government approved e-bidding for discovering the market price of gas to be sold by producers, according to changes approved by the cabinet on Oct. 7. It permit affiliates to participate in the bidding for sale of gas, and allows marketing freedom to certain field development plans where production-sharing contracts already provide pricing freedom.

All discoveries and field development plans approved after Feb. 28, 2019, have been given complete market and pricing freedom. The new norms, however, will not apply to bulk of the gas produced under administered mechanism in the nation.

“The reform is credit positive for India’s oil & gas sector as it allows affiliates of gas producing companies to offtake gas and overall should help boost production,” Vikas Halan, associate managing director at corporate finance group of Moody’s Investors Service said in a statement. “However, we don’t expect the pricing reform to provide immediate relief to domestic gas producers as large players such as ONGC Ltd. and Oil India Ltd. produce most gas on nomination blocks which are for now exempt from the revised policy.”

Detailed guidelines are awaited.

Here’s what brokerages and ratings agencies had to say about the change:

CARE Ratings

• Benefits expected to be realised in the long term provided the sector is able to attract necessary investments, which has remained miniscule for last several years.
• Gross production of domestic natural gas is to fall by 10.6% during fiscal 2021 in the short-term view.
• With the pandemic there has been a sharp fall in demand offtake from end-user industries, which too is discouraging domestic production during the year.

BOB Capital Markets

• Marginal impact on valuation and earnings for ONGC and Oil India.
• Prices would remain unattractive on sustained low oil prices, and would continue to hamper domestic gas production outlook.
• Affiliate companies of producers (especially beneficial for Reliance Industries Ltd., ONGC and Gujarat State Petronet Ltd.) to bid for volumes from these fields.

ICICI Securities

• Expect gains for ONGC in the near term from the imminent revision in gas price formula and in the medium term from gas price deregulation.
• Expect a floor price of $4.2/MMBtu for ONGC, which will be soon introduced for administrative price mechanism gas followed by phased deregulation over the next few years.

Kotak Securities

• ONGC and Oil India can potentially benefit from higher realisations on domestic gas.
• However, these stocks actually were derated after removal of subsidies on crude oil, given issues like uninspiring production trajectory, capital allocation and the government’s supply.
• City gas distributors (Gujarat Gas Ltd., Indraprastha Gas Ltd. and Mahanagar Gas Ltd.) generating super-normal returns while operating as unregulated monopolies may be at significant risk from onset of competition in the near term and plausible full deregulation of domestic gas price/allocation in the medium term.