India's top oil and gas producer ONGC on Friday said it is losing Rs 6,000-7,000 crore on natural gas business after the government-mandated rates for the fuel dropped to a decade low.
ONGC has been incurring losses on the 65 million standard cubic meters per day of gas it produces from domestic fields.
India’s top oil and gas producer ONGC on Friday said it is losing Rs 6,000-7,000 crore on natural gas business after the government-mandated rates for the fuel dropped to a decade low. The government-mandated rates are way below the cost of production of USD 3.5-3.7 per million British thermal unit, Oil and Natural Gas Corp (ONGC) Director (Finance) Subhash Kumar said. Every dollar reduction in gas price leads to a revenue loss of about Rs 5,200 crore and a Rs 3,500 crore on profit. “Our losses will be in the order of Rs 6,000-7,000 crore in current fiscal,” he said.
ONGC has been incurring losses on the 65 million standard cubic meters per day of gas it produces from domestic fields after the government in November 2014 introduced a new gas pricing formula that had “inherent limitations” as it was based on pricing hubs of gas surplus countries such as the US, Canada, and Russia. The price, according to this formula, is revised twice a year and the rate for the period beginning October 1 has been cut by 25 per cent to USD 1.79 per mmBtu.
He, however, hoped the government will act on the firm’s request and a floor price would be set to check losses. ONGC Chairman and Managing Director Shashi Shanker said the current gas price does not cover cost and the company has made representations to the Ministry of Petroleum and Natural Gas for suitable amendments to the formula. “Ministry is seized of the matter. They are favourably inclined and a committee has been constituted to look into this,” he said. Prices have to be remunerative if the domestic output has to be raised, he said.
“There is talk of a floor price and changes in the formula itself by linking the rate to relevant market benchmarks such as JKM. I cannot comment on what shape it will take but we are certainly hopeful,” he said. While the USD 1.79 per mmBtu rate applies to gas produced from fields given to the company on a nomination basis, ONGC has pricing freedom on blocks or areas it had won in auctions since 1999. Shanker said the marketing freedom granted by the government earlier this week would help monetise gas discoveries in such blocks.
The new policy allows affiliates to bid for the gas to be produced from such blocks. ONGC group companies, which have been using imported LNG as fuel, would now be able to participate in the price discovery auctions, he said. This would create competition and help realise better prices for ONGC. The group companies would also save by replacing imported fuel with domestically produced gas, he said. Most of ONGC’s current production is from nomination fields and the company is hoping to add 15 million standard cubic meters of output from KG basin using the pricing freedom it has.
Rates according to the current formula are revised every six months. Prices effective October 1 have been cut to USD 1.79 per mmBtu. This price is the lowest that ONGC got since 2010 when the government had moved towards deregulating gas pricing. In May 2010, the Cabinet had approved an Oil Ministry proposal to raise the rate of gas sold to power and fertilizer firms from USD 1.79 per mmBtu to USD 4.20 per mmBtu.
The current formula takes into account the volume-weighted annual average of the prices prevailing in Henry Hub (US), National Balancing Point (the UK), Alberta (Canada), and Russia with a lag of one-quarter. Prices are set on April 1 and October 1 each year. Oil Minister Dharmendra Pradhan, in a written reply to a question in the Lok Sabha on March 20, 2017, had stated that the cost of production of natural gas in the prolific Krishna Godavari basin is between USD 4.99 -7.30 per mmBtu. The same for other basins is in the range of USD 3.80 -6.59 per mmBtu, he had said.