Set floor price for domestic gas: Experts

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New Delhi | Published: November 28, 2017 5:55:53 AM

Despite the recent fall in prices of imported LNG, the fuel still costs $6-7 per mmbtu to domestic consumers, clearly signalling the demand for gas at prices higher than $2.89 per mmbtu fetched by domestic explorers for shallow-water gas.

floor price, domestic gas, fall in prices, prices of imported LNG, domestic consumers, demand for gas, ONGC, Petronet LNG, domestic explorersDespite the recent fall in prices of imported LNG, the fuel still costs -7 per mmbtu to domestic consumers, clearly signalling the demand for gas at prices higher than .89 per mmbtu fetched by domestic explorers for shallow-water gas.

Despite the recent fall in prices of imported LNG, the fuel still costs $6-7 per mmbtu to domestic consumers, clearly signalling the demand for gas at prices higher than $2.89 per mmbtu fetched by domestic explorers for shallow-water gas. As the ceiling price for domestic gas arrived at on the basis of a benchmark price computed on a select global index has come down from $5.05 per mmbtu in November 2014 due to the six-monthly revisions, state-run ONGC has recently written to the petroleum ministry, asking for a price increase as the current price is unviable and hitting its investment plans. Experts argue that given India’s largest importer of LNG, Petronet LNG, at present after renegotiation gets the fuel at $6-7 per mmbtu, down from $12-13 per mmbtu earlier, there is undoubtedly a case for higher price for domestic shallow-sea gas. “The government can set a floor price of around $3.5-4 per mmbtu and even if the formula-based price goes below this, it should not be considered,” said an analyst with a consulting firm requesting not to be named. ONGC has also been rooting for a floor price of $4.2 per mmbtu. The analyst added that a floor price will allow the national explorers to increase production and in turn result in saving cost as higher-priced LNG imports can be substituted.

ONGC has asked for “marketing freedom so that the markets can decide the price which has been allowed in case of the marginal fields”, according to a company executive who did not want to be named. The government in October 2014 has issued guidelines under which prices in gas-rich countries such as the US, Canada and Russia are thrown into a formula to arrive at a domestic price. At the time the guidelines came into effect in November 2014, the price was $5.05 per mmbtu for shallow-sea gas. The government has, however, allowed a higher price — which currently is $6.3 per mmbtu — for gas extracted from difficult fields. The price of gas extracted from difficult field was $6.61 per mmbtu when the fresh guideline introduced in April 2016. The prices are revised twice a year.

To reduce the country’s hydrocarbon imports, the petroleum ministry announced Discovered Small Field (DSF) Bid Round 2016 to offer 46 contract areas, discovered mostly by national oil explorers, across nine sedimentary basins with an estimated reserve of 625 million barrels of oil and oil equivalent gas. For these fields, apart from other incentives, the government has allowed complete marketing and pricing freedom for selling crude oil and natural gas produced. The analyst quoted above added that the current formula uses prices from countries wherein gas is available in abundance and so, prices tend to be low. In 2016-17, India consumed 49.7 billion cubic metre (BCM) of gas across industries including city gas, fertilisers, steel and power, among others. While the country imported 24.7 BCM of natural gas, it produced 30.8 BCM of the fuel.

An analyst from another consulting firm also believes that at the current gas price, investments may not be remunerative. “The payback period for investments and returns should be reasonable. In such low-cost regime, money will be stuck and may affect a company’s share price.” For national oil explorers, hope lies in the recent announcement made by petroleum minister Dharmendra Pradhan that the country is looking to establish a gas trading platform in the country. Though the plan may take time to materialise, the platform will enable uniform pricing which will be determined by market dynamics.

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