Surging global gas prices to affect companies' margins

The disparity between the international and the domestic prices continues, and this is putting pressures on the domestic natural gas companies.

In February so far, the average price of natural gas at Henry Hub, the largest gas trading platform, is $8.25-8.5 per million British thermal unit (mBtu). But the Indian price is Rs 2,850 per 1,000 cubic metres, which is almost $2.7 per mBtu.

While the international natural gas price had touched a record $15.5 per mBtu at Henry Hub on December 15, 2005, the Indian market price was hovering around $3.

Now, the Indian private sector gas exploration majors are quite intent on increasing their profit margins, but the prices are regulated by the government, which is opposed to any price hike.

The government is controlling the price via the PSUs selling gas at much lower prices based on administered pricing mechanism. So, the private upstream companies cannot demand more profits.

The dispute in the deals between Mukesh Ambani-controlled Reliance Industries and brother Anil Ambani-run Reliance Natural Resources and National Thermal Power Corporation is also indicative of the big gulf in the prices.

Industry analysts pointed out that by 2010 the natural gas price would go up because of the growing demand. So, the Indian market price may increase, and deals of around $3 per mBtu will not satisfy the sellers.

"In Henry Hub, the average price of natural gas in January was $9.25 per mBtu and touched a month peak of $11.25. In such a scenario, the domestic private companies are getting minimal profits," Deepak Mahurkar, principal consultant - oil and gas, PricewaterhouseCoopers, said.

Brijesh Mehra, head - country corporate and investment bank, ABN Amro, said, "The low price in India will diminish the prospects of most companies in exploration and production, but a change is not easy in the imminent future. Oil and gas prices have more implications in the country's political spectrum.

Although the profit margin is low, corporates are showing interest to invest in this sector and are expecting a change in the future."

A PricewaterhouseCoopers study shows that, by 2008-09, the annual demand of natural gas in the country will grow to 63 billion cubic metres (bcm) from the current 30 bcm, if GDP grows at 6 per cent. Oil majors are planning to meet demand, but they won't be ready to sell at minimum profits.

"The production cost of natural gas is $0.5-2.0 depending upon the conditions of the gas field. Given the exploration cost, the Indian price is slightly profitable, but the corporations cannot work on this margin for long. But, now, liberalisation is slowly creating some hopes in the segment," Mahurkar said.

The price disparity has troubled Shell's Hazira LNG terminal, and the RIL-NTPC gas deal is in the court.