Gas Price Cut

Cheap gas must now help India like cheap oil…

Cutting the price of gas was never a question of whether but when. With global gas prices falling sharply, there was never any doubt that the government will cut gas prices. After all, the Indian gas pricing formula considers the weighted average of global gas prices as the base of its methodology. It, therefore, came as little surprise when the government decided to cut gas prices by 18% on September 30th from $3.06/mmbtu to $2.50/mmbtu.

What happens to upstream? 

Some of the largest upstream players like ONGC, Reliance Industries and Oil India are likely to get affected. This is the fourth successive cut in gas prices and will hold for a period of 6 months. These cuts have brought down the price of gas by over 50% from $5.02/mmbtu to $2.50/mmbtu. For a company like ONGC, a 1 dollar decrease in gas price leads to a revenue loss of Rs.4200 crore on an annualized basis. The upstream companies are surely likely to see a hit on their top-line and their bottom-line as a result of this gas price cut.

“Difficult” gas pricing… 

To be fair, the government of India has a separate pricing formula for “difficult” gas. This refers to gas that is found through discoveries that are deepwater, ultra deepwater as well as gas that are found under conditions of high pressure and high temperature. This special pricing formula for “difficult gas” was specially designed to incentivize upstream players to explore more difficult avenues for drilling oil. Even this price of “difficult gas” has been cut from $6.61/mmbtu to $5.30/mmbtu, although it stills commands over a 100% premium to the price of normal gas.

Focus on gas users…

There are two key trends in the gas market. Gas markets are likely to remain oversupplied and that is likely to keep pressure on gas prices. Additionally, India is yet to emerge as a big market for gas. India’s gas use strategy must be guided along the following lines. Firstly, there must be a dedicated focus on companies that use gas as an input. This refers to companies in the power and fertilizer sector which use gas as a feedstock. The government must seriously look at special incentives so that these companies are able to become more market driven. Secondly, India still has low levels of gas consumption as compared to oil. Gas is a lot more environment-friendly and is in great use across most countries. This requires a larger macro approach from the point of view of India’s hydrocarbon policy. As for the upstream stocks, they will come under pressure and there is really no alternative. Like in the case of US shale, Indian upstream companies need to look at ways to reduce cost and improve the ROI. A market-driven shift may have just about begun! ©

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