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