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The markets gave a thumbs up to the Cabinet Committee on Economic Affairs' decision to double gas prices to $8.4 per million British thermal unit (mBtu), effective April 1, 2014. Not only did stocks of gas producers rise but those of consuming companies also jumped, especially from the power sector. The S&P BSE Power index was the second biggest gainer on Friday, up 4.15 per cent.
The move is seen as a positive step, that will spur investment and growth in the long term. India is an energy deficient country and has seen a decline in domestic gas output in the last three years. While Reliance Industries has reported a regular decline in output after touching a peak of close to 60 million standard cubic meters a day (mscmd) a couple of years back to less than 15 mscmd now, ONGC and Oil India's output has stagnated, too.
Higher gas prices and clarity on policy will encourage investments in the exploration and production (E&P) space, leading to more revenues and profits for hydrocarbon companies.
The long-term visibility on pricing that the formula provides should accelerate upstream investments and, given India's prospective resources (up to 91 trillion cubic feet, if enabled by higher prices, in an IHS-CERA study), be long-term beneficial to all companies in the value chain, say Citi's analysts.
The increase in prices will also improve the viability of many stalled E&P projects, unviable at lower prices of $4.2-5.7 per mBtu. Also, marginal fields having low reserves could now get explored, feel experts, while more global oil and gas majors could start exploring new assets in India. Analysts at Motilal Oswal Securities believe this would also result in fast-tracking of the capex by Reliance Industries in its satellite fields in KG-D6 and development on NEC 25.
Economic growth will also get an impetus. A K Prabhakar, senior vice-president, equity research, at Anand Rathi Securities, points out that when gross domestic product was growing at 8.5 per cent yearly, increasing gas production from the KG basin was contributing significantly. A number of industrial projects, including power generation dependent on gas, were viable and growing. Lack of sufficient gas has left an estimated 10,000 Mw of power capacity idle (or run at low capacity), consequently impacting industrial output.
Though power costs will rise, the impact on profitability of power generators (utilities) will be minimal. CRISIL Research estimates the upward revision would not have an adverse impact on profitability as domestic gas price increases are allowed to be completely passed through for fixed return as well as competitively bid projects. For fertiliser producers, too, it estimates their net profit margins to be impacted by just 30-40 basis points.
