India should benchmark its natural gas prices to similar gas-deficient nations instead of using rates prevalent in gas-surplus geographies like the US and Canada, says Standard & Poor’s Ratings Services.
Using rates in gas-surplus nations, domestic natural gas prices earlier this week were cut by 18 per cent to USD 4.24 per million British thermal unit, a rate which S&P said will “discourage oil exploration and production (E&P) companies from committing new capital expenditure (capex)”.
“The formula for pricing domestic gas considers prices in gas-surplus geographies such as the US and Canada, which have developed gas transportation infrastructure.
“Given India’s gas production deficit and emerging gas transport infrastructure, comparing prices in similar geographies will be more relevant, in our opinion,” it said in statement.
Gas prices in India, S&P said, are lower than in its regional peers as well. Natural gas prices in Thailand and Indonesia average USD 8-10 per mmBtu.
“We believe the government’s plan to stimulate private sector participation and bring in transparency in gas pricing by introducing formula-driven gas pricing is well intended. However falling hydrocarbon prices over the past one year have brought in uncertainty over the viability of exploration projects,” it said.
The gas price reduction, it said, will likely discourage capex in exploration and development of gas reserves in India, where most large finds are in deep water zones.
“Globally, several E&P companies have scaled back spending and put new exploration projects on hold amid low hydrocarbon prices,” it said.
Low gas prices could materially reduce profitability of state-owned ONGC’s planned Rs 40,000 crore investment in developing its KG-basin gas discoveries.
“Investment by private sector oil and gas companies in India has been small and their capex commitments are likely to be uncertain because of the price revision,” it added.
ICRA said the gas price reduction has significant implications for different sectors since the cut brings the rate to almost the level it was prior to implementation of the modified Rangarajan formula thereby negating all gains post implementation of the aforementioned formula.
The cut “reduces the profitability of the gas produced from the existing fields and adversely impacts the viability of new exploration and development projects”, it said.
“With most of the conventional and unconventional resources in the country being present in the more challenging and higher cost offshore areas, the effective rollback of prices to earlier levels will challenge the incumbents’ ability to justify the viability of exploration and development projects for increasing production levels,” it said.