Natural gas price may skyrocket to $10, from $4.2 on C. Rangarajan formula implementation: Goldman

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Jump in natural gas price set to generate addl revenue to meet higher subsidy outgo on fertiliser. (AP) Jump in natural gas price set to generate addl revenue to meet higher subsidy outgo on fertiliser. (AP)
SummaryC. Rangarajan natural gas price formula to raise revenue to meet higher subsidy outgo on fertiliser sector.

Natural gas price in India may jump to $10 within three years of implementation of the C. Rangarajan formula, generating enough additional revenue to meet higher subsidy outgo on the fertiliser sector.

The government has decided to price all domestically produced natural gas by both public and private sector firms at an average price of LNG imports into India and benchmark global gas rates from April 1, 2014.

Barclays Equity Research estimates the price will be USD 8.3 per million British thermal unit in 2014-15 as against the current rate of USD 4.2. This will rise to USD 9.1 in the following year and then to USD 9.4 in 2016-17.

"We estimate the gas price could be more than USD 10 per mmBtu by FY16 as per the formula," Goldman Sachs said.

The new rates, which will change every quarter based on 12-month average of global rates and LNG import price with a lag of one quarter, will apply to all gas produced by both public sector firms like Oil & Natural Gas Corp (ONGC) and private companies like Reliance Industries (RIL) Ltd.

"Prices will be revised quarterly and, in our view, will change by USD 0.1-0.5 per mmBtu for every USD 10 change in oil prices given the linkage to LNG pricing," Barclays said in a research note.

It estimated gas producers to garner USD 4 billion in revenue from higher gas prices from 2014-15 while government will rake in an additional USD 505 million from royalty, profit share, taxes and dividend.

After paying USD 360 million in additional fertiliser subsidy resulting for higher input gas cost, the government will be left with USD 101 million, it said.

ICICI Securities said the decision will "reignite investments in Indian exploration and production, especially development of offshore gas discoveries on the east coast and gradual alignment of industry demand (across sectors) to a higher gas price environment".

More than 30 trillion cubic feet of reserves in the Krishna Godavari basin can be developed at the new rates.

"Economics for marginal gas fields, primarily owned by ONGC (and some by RIL), could also improve," it said.

Oil and Natural Gas Corp's (ONGC) 2-3 Tcf reserves, 4.98 Tcf of RIL and 4 Tcf of Gujarat State Petroleum Corp (GSPC) could be viable at higher gas prices, it said.

The decision, Edelweiss Securities, is "a significant positive for the sector considering that a lot of deep water resources become viable".

Of the total domestic gas volume of about 86 million standard cubic meters per day, three key economically sensitive sectors - power, fertiliser and LPG - consume about 67 mmscmd. "We see additional burden for them of Rs 19,700 crore or 0.16 per cent of GDP," Morgan Stanley said.

"If this (burden due to higher gas price) were to be completely passed on to end consumers, we believe electricity tariffs for a gas-based plant need to be moved about 45 per cent higher. The required increase in urea prices would be over 60 per cent," Morgan Stanley said.

ICICI Securities said sectors like power and fertiliser tend to avoid high-cost gas as an input due to systemic compulsions that restrict pass-through of costs.

"On domestic gas price hike, these sectors would now be forced to align themselves to a higher gas price base," it said.

It estimated that ONGC will get Rs 16,400 crore in additional revenue and Rs 9,700 crore more profit in 2014-15 on a the projected sales of 59.5 mmscmd of gas.

State-owned Oil India will get Rs 2,000 crore on 9.1 mmscmd of production, while Reliance will garner additional revenue of Rs 3,400 crore on an output of 20 mmscmd.

Kotak Institutional Equities estimated increase in ONGC's pre-tax profit by Rs 13,300 crore at a gas price of USD 8 and Rs 20,300 crore at gas price of USD 10. Increase in its post-tax profit will be Rs 8,800 crore at USD 8 gas price and Rs 13,400 crore at USD 10.

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