India’s decision to reduce natural gas prices by 25% will dent the earnings of oil and gas exploration companies, though it will improve end-user consumption, analysts say.
State-run Oil and Natural Gas Corporation and Oil India Limited will hurt their gas sales, which accounts for close to 20% of their overall production. The majority of their production is of crude oil.
India has said that the domestic gas prices between October to April will be $1.79 per MMBTU, down from $2.39/MMBTU, which was prevailing earlier this year. ONGC and OIL’s gas production costs around $3.7/MMBTU.
“That is a clear delta of $2/MMBTU.It could be a loss-making proposition and from that perspective it is negative,” said Bhanu Patni, energy analyst at India Ratings.
However, a new gas pricing framework that is being planned could cushion the price impact. India is working on a gas price indexing mechanism that will see it switch price indexes from the low-priced markets in the US, Canada, Russia and the UK to higher priced spot markets in Japan, Korea and China.
Patni said the latest price mark down could encourage city gas distributors to pass on the benefit of a price reduction to consumers, though they had earlier in the year not passed on the benefit of a price softening.
The current announcement marks the third straight reduction in gas prices in India in the past 12 months and is the lowest level since November 2014.
Gas offtake may increase across a range of user segments that span household cooking gas consumption, CNG fuel for vehicles, urea fertilizers to gas-fired power stations, Patni said.
Plant load factors of gas-fired power stations are likely to increase from the current low level of 26%. Similarly makers of urea fertilizers will benefit as natural gas is a critical component, though around half of the feedstock requirements are imported.
On the other hand, lower gas prices would be a deterrent to investments and monetization of new gas blocks where the cost of production is as high as $5/MMBTU.
“The reduction in natural gas prices is credit negative for upstream companies such as ONGC and OIL as it will lower their revenue from gas sales. Both companies are already grappling with low oil prices, and a further reduction in natural gas prices will exacerbate the decline in their earnings,” said Sweta Patodia. analyst at Moody’s Investors Service.
But she highlighted that the impact will be limited as gas sales account for only 18%-19% of the two companies revenues.
Moody’s estimated ONGC’s revenues and EBITDA to decline by INR15-16 billion ($205-$219 million) on account of lower gas prices. The decline is equal to around 0.4% of the company’s expected consolidated revenue and around 3.5% of consolidated EBITDA for the fiscal year ending 31 March 2021.
It added that the reduction in gas prices will lower OIL’s revenue and EBITDA by around INR2.2 billion ($30 million). The decline is equal to around 2.5% of the company’s expected consolidated revenue and around 8% of consolidated EBITDA for the fiscal year ending 31 March 2021.