India Cuts Gas Price After Four Straight Hikes

India’s oil ministry has cut the price of locally-produced natural gas, the first reduction after four straight hikes since October last year.

The price of gas produced from domestic fields has been cut to $3.23 per metric million British thermal unit from $3.69 per mmBtu, the ministry’s Petroleum Planning & Analysis Cell said. The new price will be effective from Oct. 1 till March 2020.

The cut is also higher than the average of 15 estimates from analysts, companies and agencies compiled by BloombergQuint. The survey expected a price cut of $3.44 per mmBtu by the government.

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 about 36 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.

Oil & Natural Gas Ltd. and Oil India Ltd. produce and sell over 80 percent of India’s gas, while the rest comes from private players.

The reduction by the government will also take the prices marginally lower than the average cost of production of $3.59 a unit disclosed by ONGC. Cheaper prices can pose major risks to the profitability of the state-owned company’s gas business, it had said in its annual report for 2018-19.

But It Augurs Well For Some

The 12.5 percent reduction in the price of natural gas will be beneficial for some industries and users of compressed natural gas and piped natural gas, CARE Ratings said in a report.

Fertiliser industry will reap the benefits as well. A fall in natural gas prices could potentially lead to a 6 percent decrease in cost of production of urea, the report said, adding that it will decrease the working capital of fertiliser manufacturers.

The price cut will also result in lower CNG and PNG prices at a time when the economy is reeling with high petrol and diesel prices, the report said.