Talking Point: Natural gas price cut marginally to USD 2.48 per mmbtu

Rate of natural gas produced from existing fields of state-owned Oil and Natural Gas Corp (ONGC) and Reliance Industries has been cut to USD 2.48 per mmBtu for a 6-month period from April 1, from USD 2.5 per mmBtu currently. As per the new gas pricing formula approved by the NDA-government in October 2014, gas prices are to be revised every six months.

The reduction in natural gas prices would mean lower raw material cost for compressed natural gas (CNG) and natural gas piped to households (PNG) and would translate into reduction in retail prices. It would also mean lower feedstock cost for power generation and manufacturing of fertilisers. Rates were last cut by 18 per cent with effect from October 1, 2016. That had followed a 20 per cent reduction to USD3.06 last April. The price of gas between October 1, 2015 and March 31, 2016 was USD3.81 per mmBtu and USD 4.66 in prior six-month period.

“The price of domestic natural gas for the period April 1, 2017 to October 31, 2017 is USD2.48 per mmBtu on Gross Calorific Value (GCV) basis,” said a notification issued by the Oil Ministry’s Petroleum Planning & Analysis Cell. The reduction will hit producers like ONGC. Every dollar dip in gas price results in Rs 4,000 crore hit in revenue of the PSU on an annual basis. Government however hiked the cap price based on alternate fuels for undeveloped gas finds in difficult areas like deep sea which are unviable to develop as per the existing pricing formula.

The cap for April 1, 2017 to October 31, 2017 will be USD5.56 per mmBtu, up from USD5.3 per mmBtu, PPAC notification said. ONGC is the country’s biggest gas producer, accounting for some 60 per cent of the 90 million standard cubic meters per day current output. All of its gas as well as that of Oil India Ltd and private sector RIL’s KG-D6 block are sold at the formula approved in October 2014. This formula however does not cover gas from fields like Panna/Mukta and Tapti in western offshore and Ravva in Bay of Bengal.

The government had in October 2014 announced a new pricing formula that calculated local rates by using prevailing price in gas surplus nations like the US, Russia and Canada. As per the mechanism approved in October, 2014, the price of domestically produced natural gas is to be revised every six months using weighted average or rates prevalent in gas-surplus economies of US/Mexico, Canada and Russia.

Indian 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. So, the rate for April to October this year is based on average price at the international hubs during January 1, to December 31, 2016.