ONGC will lose about Rs 4,000 crore in revenue and start making cash losses after the government slashed the natural gas prices by a steep 26 per cent.
State-owned Oil and Natural Gas Corp (ONGC) will lose about Rs 4,000 crore in revenue and start making cash losses after the government slashed the natural gas prices by a steep 26 per cent by benchmarking it against rates prevalent in gas-surplus nations.
Prices of natural gas, which is used to produce fertilizer, generate electricity and gets converted into CNG for use in automobiles and piped natural gas for household cooking, was from April 1 cut to USD 2.39 per million British thermal unit – a rate about 37 per cent lower than the cost of production.
“These rates are unsustainable for us. We have already told the government that the gas pricing should be freed. There should be complete pricing and marketing freedom,” ONGC Chairman and Managing Director Shashi Shanker told PTI here.
The BJP-led government had in October 2014 evolved a new pricing formula using rates prevalent in gas surplus nations like the US, Canada, and Russia to determine the price in a net importing country. Prices using this formula are calculated semi-annually.
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.
For ONGC, which produces most of its 64 million standard cubic meters per day of gas from western offshore, the breakeven is around USD 3.8. “The rates are now way below cost,” Shanker said. For every USD 1 dollar change, the company’s revenues are impacted by Rs 4,400-4,500 crore annually.
On April 1, the gas price was reduced from USD 3.23 per mmBtu to USD 2.39 – an 84 cent reduction which translates into annual Rs 4,000 crore of revenue loss. Another company official explained that gas makes up for roughly half of the company’s bottomline and if the business makes losses, the company may soon start generating cash losses.
The reduction on April 1 was the second in six months and took rates to the lowest since the new pricing formula came into being in 2014. The price of gas produced from difficult fields such as deepsea too has been cut to USD 5.61 from USD 8.43 per mmBtu. This would just about breakeven ONGC’s new production from KG Basin.
The government had in October 2014 adopted a formula that takes into account the volume-weighted annual average of the prices prevailing in Henry Hub (US), National Balancing Point (UK), Alberta (Canada) and Russia with a lag of one-quarter. Prices are set every six months — on April 1 and October 1 each year.
This formula was adopted soon after the expiry of the USD 4.2 per mmBtu rate fixed for Reliance’s KG-D6 gas for five years. The rates at the first revision, using the new formula, came to USD 5.05 but in the subsequent six-monthly reviews kept falling till they touched USD 2.48 for April 2017 to September 2017 period. Subsequently, they rose to USD 3.69 in April 2019 to September 2019 before being cut by 12.5 per cent in October 2019 to USD 3.23.
Sources said the government realised that the pricing arrived at using the formula was way too low to make the production of gas from difficult fields such as deepsea viable. So the government in April 2016, gave a ceiling for the gas from such fields. The ceiling in April 2016 was USD 6.61 which rose to USD 9.32 in April 2019 before being cut to USD 8.43 in October and now to USD 5.61.
But this applies only for future gas production and existing deepsea finds get the lower USD 2.39 price. ONGC is India’s largest integrated oil and gas company, accounting for 75 per cent of crude oil and natural gas production by volume, and 17 per cent of domestic refining capacity