State-run ONGC to gain from linking of domestic gas price with Japan-Korea index but CGD to be hit.
Companies such as Mahanagar Gas and Indraprastha Gas derive around 75% of their revenue from CNG.
Retail prices of compressed natural gas (CNG) may see hikes of as much as 18%, if the price of domestic gas is linked with the higher benchmark rates of Japan and Korea, analysts said. Responding the recent media reports about the government planning to revise the formula for determining the rate of domestic natural gas, several research agencies have pointed out that such a move will be beneficial for gas producers, mainly state-run Oil and Natural Gas Corporation (ONGC), but will impact entities engaged in city gas distribution (CGD).
“As retail prices are adjusted for Japan Korea Marker (JKM) linked prices, retail prices need to be increased by Rs 7-8/kg or 17-18% and this impacts attractiveness of CNG to petrol,” Credit Suisse said in a latest note on the Indian gas sector. The investment banker noted that it can also impact the penetration of piped natural gas (PNG) for residential cooking connection as it will lead to a price hike. Companies such as Mahanagar Gas and Indraprastha Gas derive around 75% of their revenue from CNG.
Currently, domestic gas price is linked to the weighted average price of four global benchmarks (the US, the UK, Canada and Russia). This is as per a policy announced in 2014, which allows six-monthly price revisions, according to the index.
The current price of $2.39/mmBtu for gas produced from local fields is even below the breakeven point for most fields. The average output cost of ONGC — which produces about 80% of domestic natural gas — is around $3.7/mmBtu. CARE Ratings had earlier noted that gross production of domestic natural gas will fall by 10.6% during FY21 as “no company would aggressively want to increase production or get into high risk projects with such a low gas price”.
Edelweiss Securities said that linking prices to JKM might raise domestic gas rates by $2/mmBtu. However, the brokerage firm notes that even at these levels, “CNG will continue to be highly competitive at 37% cheaper than diesel” as “over the past six months, the CNG sector has had a structural uplift in competitiveness as diesel prices have permanently risen by Rs 14–16/litre due to a Rs 13/litre hike in excise duty”.
Officials at the ministry of petroleum and natural gas, however, told FE that the ministry has not formed any committee to restructure the formula for domestic natural gas price, as reported by sections of media. Indigenous natural gas production caters to about 50% of the country’s requirements. Demand for natural gas in the domestic market is largely dependent on fertiliser (28%), power (23%), city gas distribution entities (16%), refineries (12%) and petrochemicals (8%) industries. The country aims to increase the share of natural gas in its energy mix to 15% by 2030 from the current level of about 6%.