Govt slashes domestic gas prices by more than a quarter

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Published: April 1, 2020 12:55 AM

Domestic natural gas production has already decreased 4.3% annually to 28,769 million metric standard cubic meter (mmscm) for the current financial year till February, mainly due to the ageing of the existing fields.

Ceiling price for gas to be produced from difficult fields has also been slashed 33.5% to $5.61/mmBtu.Ceiling price for gas to be produced from difficult fields has also been slashed 33.5% to $5.61/mmBtu. (Representative image)

In line with the fall in global gas prices due to higher production and coronavirus-induced low demand, the Union government has cut the price of domestic gas by a sharp 26% to $2.39 per million British thermal units (mmBtu). The new price will be effective for six months starting April 1.

Ceiling price for gas to be produced from difficult fields has also been slashed 33.5% to $5.61/mmBtu.

The reduction in price is the second straight cut after the government, in September 2019, lowered domestic natural gas prices by 12.5% to $3.23/mmBtu. Domestic gas price is linked to the weighted average price of four global benchmarks (USA, UK, Canada and Russia). Spot LNG prices globally have fallen more than 42% in just one month to $3.4/mmBtu.

Analysts have pointed that price cuts can potentially discourage upstream companies to take up new domestic gas exploration. “Upstream oil and gas exploration companies will not benefit with the decrease in gas prices as it will lead to low earnings due to decline in per unit realisations in the natural gas segment,” Care Ratings noted.

Moody’s Investors Service had termed the earlier gas price reduction as “credit negative” for state-run Oil and Natural Gas Corporation (ONGC) which produces about 76% of domestic natural gas output. In FY19, the gas business contributed 17% revenue to ONGC’s upstream business. Moody’s has also recently downgraded the credit quality rating of ONGC by one notch, mainly due to its weak cash reserves amid the increasingly uncertain global oil price environment.

Domestic natural gas production has already decreased 4.3% annually to 28,769 million metric standard cubic meter (mmscm) for the current financial year till February, mainly due to the ageing of the existing fields. Of this, the share of production by private players was 4,471 mmscm, down 11% year-on-year (y-o-y).

On the other hand, consumption has increased 5.5% annually to 58,742 mmscm in April-February, increasing import dependency. The cumulative import of 30,812 MMSCM for the current financial year till February was higher by 16.9% y-o-y. LPG consumption in April-February was up 6.2% annually to 24.1 million tonne. At January-end, there were 27.6 crore active LPG users in the country, up 9.4% year-on-year.

However, natural gas end-users such as urea and petrochemical manufacturers are seen to benefit from the price cut. City gas distribution entities, which are a priority sector under the gas utilisation policy, would also gain from decreasing prices. Following the government’s announcement to cut prices in September, Indraprastha Gas had reduced the selling prices of compressed natural gas by Rs 1.90 per kg in Delhi and Rs 2.15 per kg in Noida, Greater Noida and Ghaziabad.

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