The government last week marginally cut the natural gas price paid to producers to $2.48 per million British thermal unit (mbtu) effective for six months from April 1.
“With the latest marginal fall from $2.50 per mbtu for the second half of 2016-17, the domestic price is now well below the average cost of production for many producers for a sustained period, leading to losses, which has forced the industry to seek a floor price,” Icra said in a report.
“The material appreciation in the Indian rupee against the US dollar, if it sustains, would have a further adverse impact on the gas producers,” Icra’s Senior Vice-President K. Ravichandran said.
“The issue of such low prices for a sustained period making exploration and production unviable, even for benign geologies, would have to be addressed on a priority in order to incentivise domestic production and balance the interest of upstream producers with consumers,” the report said.
As per the new gas pricing formula approved in October 2014, gas prices are to be revised every six months. The price was $5.05 per mbtu when the formula was first applied in November 2014.
The government has, however, raised the ceiling price for gas exploration in difficult areas like deep seas which are unviable to develop as per the existing pricing formula.
The cap for the April 1, 2017 to October 31, 2017 period will be $5.56 per mbtu, up from $5.3 per mbtu, which could incentivise development of such projects, Icra said.
US investment banking firm Jefferies said that while downstream companies will continue to benefit from lower gas prices, upstream ones will have to wait till the second half of the fiscal for an upward revision.
“Continued low domestic gas price will benefit users of domestic gas such as city gas distribution companies Indraprastha Gas and Mahanagar Gas and GAIL’s LPG business,” the American agency said in a report.
“On the other hand upstream companies like ONGC, Oil India and Reliance will have to wait for the next revision due to on 1st October, when we expect gas price to be revised upwards to $3.5 per mbtu (Net Calorific Value),” the report added.
Domestic gas prices are calculated by taking weighted average price at Henry Hub of the US, National Balancing Point of the UK, rates in Alberta (Canada) and Russia with a lag of one quarter.