With the government reducing the price of domestic natural gas to $1.79 per million British thermal units (mmBtu), analysts expect state-run gas producers Oil and Natural Gas Corporation (ONGC) and Oil India (OIL) to face losses of Rs 7,500 crore cumulatively in FY21 from their gas businesses. Under-recoveries from gas production in FY20 for ONGC-OIL were in the range of Rs 1,700 crore to Rs 2,000 crore, when average gas price was $3.5/mmBtu, India Ratings said on Thursday. The average gas output cost of ONGC — which produces about 80% of the domestic natural gas — is $3.7/mmBtu.
Gas sales account for around 18%-19% of the companies’ upstream revenues. Analysts at Moody’s estimate ONGC’s revenues and earnings before interest, tax, depreciation and amortisation (Ebitda) to decline by Rs 1,500 crore – Rs 1,600 crore on account of lower gas prices. “The decline is equal to around 0.4% of the company’s expected consolidated revenue and around 3.5% of consolidated Ebitda for FY21,” Moody’s said.
The Union government slashed domestic gas prices by 25.1% to $1.79/mmBtu as higher production and coronavirus-induced low demand has suppressed global gas prices. This is the third straight cut after the government, in September 2019, lowered domestic natural gas prices by 12.5% to $3.23/mmBtu. “The lower gas prices also act as a deterrent for investments in and monetisation of gas fields, as gas production costs from newer blocks is estimated to be over $5/mmbtu,” India Ratings said.
By the end of Thursday, ONGC shares were trading at Rs 69.15, which was 0.22% lower than the previous day’s close.
“Domestically, the extremely low gas prices are a cause of anxiety for gas producers,” ONGC had said in its FY20 annual report, adding that “without the necessary policy support and fiscal incentives the prospect of a gas-based economy looks difficult”. The country aims to increase the share of natural gas in its energy mix from the current level of about 6% to 15% by 2030.
The domestic gas price is linked to the weighted average price of four global benchmarks (US, UK, Canada and Russia). Spot US LNG prices have fallen more than 21% in the last six months to $1.5/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”. Indigenous natural gas production caters to about half of the country’s requirements.