NATURAL GAS PRICE HIKE

Move to Help Lure More Investments, Benefit Producers 

The proposed increase in natural gas price will attract more investments and help improve domestic availability in the next few years. It is good for producers as well as transporters and even consumers, excluding those who are subsidised. A barrel of crude oil typically translates into slightly less than 6 million metric British thermal units, or MMBTU, and at $100 per barrel it costs roughly $17 per MMBTU. The energy equivalent cost of refined products such as LPG, petrol and diesel is even higher. Compared to this, the natural gas price even at $8 per MMBTU is substantially lower. In other words, even at the higher price, there will be growing demand for natural gas as consumers switch from liquid fuels. Still, coal will compete as a cheaper alternative. Domestic production of natural gas has been stagnating for a long time. The annual average rate of growth for India’s natural gas production was just 1.2% for the last decade. In fact, during the last three years, production has fallen at over 10% on an average annually with the KG basin output crashing. It is imported natural gas — in the form of LNG — that is increasingly used to bridge the gap. Over one-third of the natural gas consumed within the country is imported. But it is the power sector which will be worst hit. “If gas prices were to increase from the current levels, gas-based power plants would move further down in the merit order despatch schedule, thus increasing offtake risks. The benchmark cost of generation from a domestic gas-based power plant could be 53% higher at . 5.41/kwh, compared with a coal-fired domestic plant operating at benchmark parameters,” says Salil Garg, director, corporates at India Ratings. However, the opinion is somewhat divided. According to Debasish Mishra, senior director, Deloitte Touche Tohmatsu India, a landed cost of up to $10 per MMBTU could be manageable for the power industry since the cost of power would still remain below . 4.5 per unit at that price. For the fertiliser industry, the gas price is pass-through, so any hike will have an impact on the fertiliser subsidy bill. However, the key question, as Deloitte’s Mishra points out, is whether there will be any immediate improvement in the domestic availability of natural gas if the gas prices are raised. Needless to say, the development is positive for the producers such as ONGC, Oil India and Reliance Industries and the only question could be which one benefits the most. A report from Macquarie, a foreign research house, mentions ONGC and Oil India as the biggest beneficiaries with potential profit growth of 10-14%, but cautions against a subsequent increase in subsidy burden. For Reliance Industries, it estimates net profits of FY15 to gain 2% from every $1/mmbtu increase in gas price.