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Domestic gas price cut by 25%, negative for ONGC, OIL; positive for end users

Updated : October 01, 2020 06:45 PM IST

The price of domestic natural gas for the second half of the financial year 2020-21 is cut by 25.1 percent to $1.79 per MMBTU as against the earlier price of $2.39 per MMBTU. The ceiling price for deepwater natural gas is set at $4.06 per MMBTU for the period starting October 1 until March 31, which was earlier at $5.61 per MMBTU. The sharp cut in the domestic natural gas price comes on the back of a cut in global prices, also impacted due to the coronavirus pandemic, which has lowered demand while production is higher.

The impact of the price cut will be on companies like ONGC and Oil India which are into exploration and production of 80 percent of domestically produced natural gas in India. The move will impact both realisation and profitability of the companies, as crude prices have not recovered from their lows.

"This could potentially discourage upstream companies to take up domestic gas exploration which is already down by 13.2% y-o-y in the current financial year (April-August) due to the low offtake of domestic natural gas. Going forward, the gross production of domestic natural gas is to fall by 10.6% during FY21. E&P prospects in FY21 do not look promising as no company would aggressively want to increase production or get into high-risk projects with such a low gas price," CARE Ratings highlighted in its report on the new prices.

Reduction in domestic natural gas prices will have a positive impact on the end-user sector like fertiliser, power, city gas distribution as the benefit of the lower domestic gas prices will be passed on to the CNG, PNG users.

"A 25.1% fall in natural gas prices augurs well for natural gas end-users as it substantially decreases the cost of manufacturing of urea and petrochemicals where natural gas is used as a feedstock. It will also result in the fall in prices of CNG and PNG which will benefit the consumers. A decrease in the price of Natural gas will also be beneficial for the margins of the power sector and sponge iron industry where it used for the generation of energy. Broadly 48% of natural gas is used as feedstock and the remaining 52% is used for fuel and power," said CARE Ratings.

The domestic natural gas price is calculated on a formula that comprises natural gas prices of the USA, Canada, UK, and Russia.

Some of the reports suggest that the government is looking at changing the domestic gas price formula on the popular Asian LNG tariff benchmark of Japan-Korea marker to help companies like ONGC, Oil India.

Correction: The ceiling price for deepwater natural gas has been rectified to $4.06 per MMBTU (in the article) for the period starting October 1 until March 31.
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