India Seen Raising Domestic Natural Gas Price To Over Three-Year High: BQ Survey
India is expected to hike prices of domestic natural gas for the fourth time in a row, according to a survey conducted by BloombergQuint, in what will boost the earnings of the fuel’s producers.
The government may increase the price to $3.74 per million British thermal units for six months starting April 1, the highest in more than three years, an average of 15 estimates from analysts, companies and agencies compiled by BloombergQuint showed. The rates of the locally produced gas are revised every six months according to the pricing formula.
The government introduced the administered pricing mechanism in November 2014. Since then, gas prices have fallen close to 51 percent. As demand for fuel grows, India plans to double the share of natural gas—an alternative to dirtier kitchen and auto fuels that can curb pollution—in its primary energy basket to 15 percent in the next few years. Also, gas is cheaper than crude—the nation’s primary import—and can help lower India’s import bill.
Oil and Natural Gas Corporation Ltd. and Oil India Ltd. produce and sell nearly 83 percent of India’s total gas, while the remaining 17 percent comes from private producers like Reliance Industries Ltd., Vedanta Ltd. and Hindustan Oil Exploration Ltd., among others.
A higher gas rate will increase ONGC and Oil India’s per share earnings by 7 percent and 9 percent, respectively, according to BloombergQuint’s calculation, assuming everything other than their gas selling rate remains same.
The latest hike will raise prices marginally above the average cost of production of ONGC. The state-run oil and gas explorer has been unable to recover the total cost of production at current prices, making the gas business loss-making. The average cost of production stood at $3.59 per million British thermal unit in the financial year ended March 2018. The company in its annual report said the losses impact its ability to fund capital expenditure plans and future development projects.
The rise in prices of natural gas will increase the cost of manufacturing urea and petrochemicals where the fuel is used as a feedstock. Also, the prices of compressed and piped natural gas will go up. The price hike will put pressure on the margin of the power sector and sponge iron makers where it’s used to generate energy.