Slashing domestic gas prices may lower rev for cos: Ind-Ra

The 18 per cent cut in natural gas prices will lower revenues of producers by around Rs 2,000 crore during second half of 2016-17 fiscal, India Ratings and Research (Ind-Ra) said today.
Domestic natural gas price has been cut to USD 2.50 per million British thermal unit for the period of October 1, 2016 to March 31, 2017 from the previous price of USD 3.06.
The price cut by the government is in line with the fall in US Henry Hub gas prices over the reference period (July 2015 to June 2016). Prior to this reduction, the government had reduced domestic gas prices by 20 per cent in April 2016.

This is the fourth consecutive gas price reduction since the implementation of the domestic gas pricing formula in October 2014.
"The present gas prices are about 50 per cent lower since the implementation of the gas pricing formula," Ind-Ra said.
The average Henry Hub gas prices declined by 15 per cent to USD 2.24 per mmBtu for the current reference period of July 2015-June 2016 period compared to USD 2.62 for previous reference period of January 2015-December 2015.

The reduction in natural gas price will most impact public sector firms Oil India Ltd (OIL) and Oil and Natural Gas Corporation (ONGC), which contribute around 75 per cent of the total domestic gas production.

"Despite the decline in sale price, lower costs in terms of rig and vessel rentals will provide some relief to margins in this segment. However, the expected fall in margins is likely to result in a lower investment surplus for future exploration," it said in a note.
Gas utility GAIL India may witness around Rs 900-1000 crore lower trading revenue from the sale of domestic gas during second half of current fiscal on account of lower per unit realisation.
"Given that the current price of domestic gas will be close to the marginal cost of production for most players, a further fall in natural gas prices can lead to losses for these players," it said adding there is a possibility for a formula revision or setting up of a floor price by the government to protect the domestic producers.

However, the end-consumers of compressed natural gas (CNG) and piped natural gas (PNG domestic) can benefit from the downward price revision.
The revised price will translate into City Gas Distribution (CGD) entities lower costs of around Rs 1.4-1.5 per standard cubic metre (SCM) on gas procurement.
The PNG prices have been reduced by Re 1 per scm and CNG by Rs 1.4 a kg in Delhi, post this gas price revision.
Stating that price of alternate fuel, diesel have increased by 8 per cent this fiscal, Ind-Ra said CGD entities may pass on between 40-70 per cent of the benefit of gas price reduction to the end consumers.

This, it said, would lead to a price cut of around Rs 0.50-1 per scm in PNG prices and around Rs 0.7-1.4 per kg in CNG prices across CGDs.