Oil India (OIL) and Oil and Natural Gas Corporation (ONGC) which contribute approximately 75% of total domestic gas production will bear the maximum revenue loss. The revised pricing will pose viability challenges for fields which have production cost upwards of USD3/mmbtu (million british thermal unit). In the mid-stream segment, Gail (India) ('IND AAA'/Stable) may experience around INR17bn- INR18bn lower trading revenue, from the sale of domestic gases during the 1HFY17.
Simultaneously, the CNG and PNG domestic end-consumers of city gas distribution entities (CGD) may benefit from the downward price revision. The move will benefit fertiliser, power and steel companies who heavily rely on natural gas and it will lower working capital requirements. The revised price means CGD entities could incur INR1.9-INR2.0 lower cost per SCM on gas procurement. Over October 2015-March 2016, the price of alternate fuel, namely diesel increased by 8%, while CNG remained unchanged, thus increasing the fuel competitiveness of CNG. Considering that the pricing power for CNG and PNG lies with the CGD entities, the quantum of benefit passed on to the consumers may vary across consumers and geographies. An INR1/kg cut in CNG prices will make CNG 47% more competitive than diesel in Delhi, compared with 41% currently. As CNG contributes more than 50% of total volume of gas sold by CGDs, higher competitiveness will help volumes thereby compensating for loss in revenues from the price cut to some extent.
The government announced the reduction in domestic gas prices by 20% to USD3.06/mmbtu applicable for 1 April 2016 to 30 September 2016. However, the benefit of reduced gas price will be marginally offset by the near 2% rupee depreciation over October 2015 to March 2016. This is the third consecutive domestic gas price reduction since the implementation of the domestic gas pricing formula and is driven by the decline in average gas prices prevalent at the reference hubs over the period January 2015-December 2015. The price of gas has declined by around 39% since the implementation of the gas pricing formula in October 2014.
The previous downward price revision was to USD3.82/mmbtu from USD4.66/mmbtu on 1October 2015. The average Henry Hub gas prices declined by 22% to USD2.6/mmbtu for the current reference period of January-December 2015 period from USD3.35/mmbtu compared to previous reference period of July 2014-June 2015. An appreciation of the rupee will, however, be positive for domestic consumers as the price of gas in INR/scm will be lower.
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