Domestic gas price up 62%, to hit user industries, consumers; ONGC, RIL gain

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October 01, 2021 5:00 AM

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 risen from around $2.4/mBtu in April to $4.2/mBtu in August.

Gas powerGE believes that a two-part tariff based on peak and non-peak demand is key to address the flexibility needs of the system, it said. (File)

The Union government has raised the price of domestically produced gas by 62% to $2.90 per million British thermal units (mmBtu) as lower production amid higher demand increased North American and European gas prices. The ceiling price for gas to be produced from difficult fields — which have higher pricing and marketing freedom — has been raised by 69% to $6.13/mBtu.

The move could have adverse implications for use industries including power and fertilisers, could spike inflation and strain the country’s current account. It may also impact farmers if the government doesn’t hike subsidy on fertilisers to offset the rise in prices of imported urea and DAP. City gas units may pass on the price hike to consumers.

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 risen from around $2.4/mBtu in April to $4.2/mBtu in August.

The new prices will be effective for six months starting October 1.

The Centre had slashed domestic gas price by a sharp 25.1% to the all-time low rate of $1.79/mBtu in September 2020, and had kept the rate unchanged in the last price revision in April. For difficult fields, the tariff ceiling was cut by 27.6% to $4.06/mBtu in September 2020, and in April it was cut by another 11% to $3.62/mBtu. The domestic gas price is linked to the weighted average price of four global benchmarks (US, UK, Canada and Russia).

The rise in prices is seen to benefit state-run Oil and Natural Gas Corporation (ONGC) — the producer of about 80% of the domestic natural gas — which was facing severe under-recoveries at previous rates with production cost of around $3.7/mmBtu. Analysts at HSBC Securities had said a $1/mmBtu change in the gas price could impact the company’s FY22 earnings by 20%.

Rising prices coincide with gas production being ramped up at the difficult fields of Reliance Industries and BP’s ultra-deep-water KG-D6 Block in the Krishna Godavari basin and ONGC’s U1B deep-water gas located in KG-DWN 98/2 block on the east coast.

City gas distribution (CGD) players are the largest consumers of domestic gas under the administered price mechanism (APM), procuring a third of the fuel sold under this tariff regime. CGD entities are expected to pass the price hike through to end consumers, keeping their margin intact.

However, analysts at Edelweiss Securities pointed out that even if APM gas prices soars to $7.2/mmBtu, compressed natural gas (CNG) will remain 35% cheaper than diesel and half that of petrol, keeping demand intact. Gas prices make up only 16% of CNG selling prices. Analysts at Jefferies had recently said around 10% hike (Rs 4.5/kg) would be needed by CGD players if their margins are to be kept intact at domestic gas prices of $3.2/mmBtu. The current price of CNG is Rs 45.2/kg in Delhi and Rs 52/kg in Mumbai.

Indigenous natural gas production caters to about only 51% of the country’s requirements. Domestic natural gas production had fallen 8.1% year-on-year (y-o-y) to 28,670.6 million standard cubic metre (mscm) in FY21. The output increased 19.2% y-o-y to 2,898 mscm in August. The price hike is seen to encourage gas producers to aggressively increase production or get into new high-risk projects.

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