As gas price set to drop more under Narendra Modi regime, ONGC pleads for floor price to be fixed

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New Delhi | Published: September 29, 2016 6:37:59 AM

With regulated domestic natural gas price set to drop 20% for the six months from October 1, state-run ONGC, the country's largest gas producer, has knocked on the government's door, asking for remunerative price.

 

For ONGC, each dollar decrease in gas prices reduces annual revenue by R4,200 crore and profit by R2,400 crore. (Reuters)For ONGC, each dollar decrease in gas prices reduces annual revenue by R4,200 crore and profit by R2,400 crore. (Reuters)

With regulated domestic natural gas price set to drop 20% for the six months from October 1, state-run ONGC, the country’s largest gas producer, has knocked on the government’s door, asking for remunerative price.

“We have requested the government to fix a floor price for natural gas,” DK Sarraf, chairman and managing director of ONGC, told FE on Wednesday. The 57-year-old head of the government-owned explorer, however, did not disclose if he sought a fixed floor price or a formula to determine the floor price.

For ONGC, each dollar decrease in gas prices reduces annual revenue by R4,200 crore and profit by R2,400 crore. The natural gas price for domestic fields is likely to drop to $2.45/mBtu (on gross calorific value basis) for October 2016-March 2017 period as against $3.06/mBtu in the preceding six months.

gas priceThe price was $3.82/mBtu during October 2015-March 2016, which was derived based on a formula approved by the Modi government in October 2014 that is linked to US, Canadian, UK and Russian rates.

A drop in gas price will also hit other producers like Reliance, Cairn and GSPC.

ONGC faces drop in gas prices at a time when new projects such as Daman and Vasai East and other redevelopment projects like Mumbai High will augment gas production from Q3 and Q4 of the current financial year.

Edelweiss Securities estimates one bcm natural gas from these projects each in FY17 and FY18. In the first quarter of FY17, ONGC gas production clocked at 5.17bcm showing a 6% drop year-on-year but rose 5% quarter-on-quarter. It also exceeded analysts’ estimate of 5 bcm output in the quarter.

Meanwhile, the ceiling price for natural gas drilled from difficult areas such as high-pressure-high-temperature is also likely to drop to less than $6/mBtu from $6.61/mBtu on gross calorific value now. ONGC has started selling natural gas from the first development well at the S1-Vashishta gas fields located in the Krishna-Godavari (KG) offshore basin at a ‘premium.’ This is a deep water field and current production is hovering 0.6 mmscmd.

Not incentivising domestic gas producers could hamper petroleum minister Dharmendra Pradhan’s strategy to increase proportion of natural gas in India’s energy mix from existing 6.5% to 15%. The world average of gas proportion in energy mix is 23.5%.

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