Gas producers continue to bleed as govt-dictated prices remain low: ICRA

Natural gas production remains a loss-making proposition for most fields for the Indian upstream producers as government-dictated gas price remains at its lowest level, rating agency ICRA said. The domestic gas price notified at US $1.79 per million British thermal unit for the six months beginning April 1 remains the lowest since the institution of the modified Rangarajan formula.

Additionally, the ceiling on price for gas produced from deep water, ultra deepwater, high temperature and high-pressure fields has also been announced at $ 3.62 per mmBtu for April-September 2021-22 which is 10.8 per cent lower than the price ceiling of USD 4.06 for October-March 2020-21 which would dampen the development of such projects.

“While this is unfavourable for domestic producers, it will benefit gas consumers. The consumers will also benefit in the long run from the expectations of continued supply overhang,” ICRA said commenting on the gas price notified by the government earlier this week.

As per an ICRA note, at such low gas prices, gas production remains a loss-making proposition for most fields for the Indian upstream producers notwithstanding some decline in oil field services/equipment costs. However, the depreciation of Indian Rupee against US dollar, would aid the realisations of the gas producers but only to an extent.

Sabyasachi Majumdar, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA, said, “Going forward, the supply glut is expected to keep prices of domestic gas low in the near to medium term leading to poor returns even as domestic gas producers such as ONGC and Reliance Industries Ltd-BP ramp up gas production significantly.”

The absence of a floor and sustained low prices as has been seen in the past few years post implementation of the modified Rangarajan formula make exploration and production unviable even for benign geologies, ICRA noted. “Accordingly, low natural gas prices remain negative for the upstream sector adversely impacting revenues, profitability and cash accruals and the incumbents have petitioned the Government of India to provide a floor price for gas prices,” ICRA note said.

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