India hiked the prices of locally produced natural gas to its highest in at least two years in what will boost earnings of producers like Oil and Natural Gas Corporation Ltd. and Oil India Ltd.
The government increased the price by 6 percent to $3.06 per million metric British thermal units, according to a circular by the Petroleum Planning and Analysis Cell. This is the second consecutive hike after five straight cuts. The ceiling price for gas to be produced from difficult fields was also hiked 8 percent to $6.78 per mmBtu for the six months to September 2018.
The government last raised gas prices when it introduced a new pricing formula in November 2014. Since then, it has reduced prices by more than half making the gas business loss making for explorers like ONGC. This revision in gas prices will bring in some relief for the upstream companies in the coming quarters and could lift their gas business.
ONGC and Oil India produced and sold nearly 80 percent of India’s total gas output in the first 10 months of the financial year 2017-18, while the remaining 20 percent came from the private players like Reliance Industries Ltd., Gujarat State Petroleum Corporation Ltd., Hindustan Oil Exploration Ltd. and others.
Though the contribution of gas business is less on the revenue and operational front, a $1 per mmBtu rise can lift the earnings per share of ONGC and Oil India by at least 10 percent, said Jefferies. Higher gas prices may encourage producers to boost investment and production, helping the country meet its goals of cutting energy imports and more than doubling the share of gas in the energy mix.
The increase in prices of natural gas has a strong likelihood of it leading to rise in prices of PNG (piped domestic cooking gas) and CNG (auto fuel), as it will put pressure on margins of the retail fuel distributors, fertiliser makers and power producers, which use natural gas as a feedstock.