Marginal re­duc­tion in do­mes­tic gas prices, ru­pee ap­pre­ci­a­tion to ad­versely im­pact up­stream gas pro­duc­ers: ICRA

Power Watch India - - COVER STORY INSIDE VIEW -

Fol­low­ing the im­ple­men­ta­tion of the mod­i­fied Ran­gara­jan Com­mit­tee for­mula, the price of do­mes­tic gas has re­duced to US$2.48/mmbtu (GCV ba­sis) for H1 FY2018 (April 1, 2017 to Septem­ber 31, 2017) which is less than half of US$5.05/mmbtu ap­pli­ca­ble from Novem­ber 1, 2014 to March 31, 2015, when the mod­i­fied Ran­gara­jan for­mula was first im­ple­mented. With the lat­est marginal fall from US$2.50/mmbtu for H2 FY2017, 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 for the mod­i­fied Ran­gara­jan for­mula from the Gov­ern­ment of In­dia.

Ac­cord­ing to K Ravichan­dran, Se­nior Vice-Pres­i­dent and Group Head, Cor­po­rate Rat­ings, ICRA, “With con­tin­u­ance of low gas prices, the up­stream gas pro­duc­ers will be hit the most as gas pro­duc­tion con­tin­ues to be a loss-mak­ing ven­ture for most fields. The ma­te­rial ap­pre­ci­a­tion in In­dian Ru­pee (INR) against US$, if sus­tains, would have a fur­ther ad­verse im­pact on the gas pro­duc­ers. The gov­ern­ment has not ac­ceded to the re­quest of the do­mes­tic pro­duc­ers for a floor so far; which could be a key bot­tle­neck in achiev­ing a higher share of gas in the en­ergy con­sump­tion of the coun­try targeted by the GoI it­self. Fur­ther­more, 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.”

How­ever, there is a sil­ver lin­ing that the gas price ceil­ing for com­plex new dis­cov­er­ies has been in­creased to US$5.56/mmbtu for H1 FY2018 from US$5.30/mmbtu, which could in­cen­tivise devel­op­ment of such projects.

From the con­sumers’ per­spec­tive, the down­ward re­vi­sion in do­mes­tic gas prices is a pos­i­tive sign for the user in­dus­tries. With a marginal down­ward re­vi­sion in the do­mes­tic gas price and ap­pre­ci­a­tion in INR, the over­all cost of do­mes­tic gas-based power gen­er­a­tion could de­cline marginally (by 2 per cent). For the fer­tiliser sec­tor, nearly 57 per cent of the gas re­quire­ment of the fer­tiliser sec­tor is met through do­mes­tic gas while the re­main­ing is met through R-LNG im­ports.

Ac­cord­ing to ICRA es­ti­mates, for the city gas dis­tri­bu­tion sec­tor, while the re­duc­tion in gas price is minis­cule and on its own may not war­rant a cut in CNG and PNG (do­mes­tic) prices by the CGD play­ers, when cou­pled with the ex­change rate im­pact, in­put cost has un­der­gone a re­duc­tion. As­sum­ing that the CGD play­ers main­tain their cur­rent ab­so­lute con­tri­bu­tion mar­gins in Rs/kg and Rs/scm terms, the CGD play­ers could cut CNG price and Rs PNG (do­mes­tic) prices marginally by Rs 0.5-1/Kg and Rs 0.3-0.5/scm re­spec­tively.

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