Sector News

The cut, reflecting a fall in global prices, could lower prices of PNG for cooking and of CNG that is ‘used in automobiles

Mumbai: The price of domestically produced natural gas has been fixed at $3.82 per million metric British thermal units (mmBtu) till March 2016, 18% lower than the price being offered until now.

The cut, reflecting a fall in global prices, will bring down the price of piped natural gas (PNG) for cooking purposes and of compressed natural gas (CNG) used in automobiles, if the city gas distribution companies pass on the price fall to end consumers. It will also lead to a reduction in input costs for power and fertilizer companies in India.

“…the price of domestic natural gas for the period 1 October 2015 to 31 March 2016 is given hereunder: $3.82 per mmbtu on gross calorific value (GCV) basis,” said a note released by the Petroleum Planning and Analysis Cell (PPAC), a statistical body under the oil ministry, on Wednesday.

On a net calorific value (NCV) basis, the price applicable from 1 October to 31 March 2016 will be approximately 10% higher at $4.2 per mmBtu, from around $5.18 per mmBtu six months ago.

Calorific value is the heat value obtained from one volume unit of gas. While NCV doesn’t take into account the latent heat of vaporization, GCV includes all the heat released by the fuel.

The price of domestic natural gas is fixed based on a formula notified in October 2014. The formula takes into account the annual average of daily prices of global benchmarks—Henry Hub (HH) in the US and National Balancing Point (NBP) in the UK—and the annual average of monthly prices at the Alberta Hub of Canada and Russia.

These prices are then taken as weighted averages of the respective volumes of natural gas consumed in these regions. The final price is arrived at based on a one-year average with a lag of one quarter.

The price on a GCV basis had been fixed at $5.05 per mmBtu in the first revision announced in October 2014 but was revised down to $4.66 per mmBtu from April 2015, aided by over a 50% fall in crude oil prices globally. After the current revision, the price of domestically produced natural gas has come down by almost a quarter in a year’s time.

The lower price of gas means that even firms which supply consumers of PNG and CNG, commonly called city gas distribution (CGD) companies, such as Indraprastha Gas Ltd (IGL) and Gujarat Gas Ltd (GGL), will benefit as natural gas becomes a more competitive fuel as compared with diesel, petrol and liquefied petroleum gas (LPG, or cooking gas). Their benefit will be even more if they decide not to pass on the benefit to end consumers.

“Lower gas prices will benefit IGL’s CNG and domestic PNG business (~83% of its volumes). Volumes will be driven by competitiveness of CNG versus petrol/diesel and convenience of usage of PNG in domestic households.

Gujarat State Petronet Ltd will benefit as it has stakes in Gujarat’s CGD firms Gujarat Gas and Sabarmati Gas, which account for a third of its volumes,” said Jal Irani, an analyst with Edelweiss Securities Ltd, in a note released on Wednesday.

He said gas transportation company GAIL (India) Ltd will also benefit as input costs of its LPG business will reduce.

Shares of IGL rose 3.70% to Rs.478.05 while those of GGL rose 2.76% to Rs.519.10 on Wednesday. India’s benchmark Sensex rose 1.46% to 26,154.83 points at close of trading hours.

The cut in prices is, however, a negative for gas producers like Oil and Natural Gas Corp. Ltd (ONGC) and Oil lndia Ltd (OIL).

“We believe the coming 19% price cut will hurt ONGC’s FY16E earnings by 5% as gas contributes 40% of its upstream production. Given the limited exposure to upstream, the impact on Reliance Industries Ltd (RIL) will be limited,” said Irani in the note.

At close of market hours, ONGC was trading at Rs.229.50 on BSE Ltd, up 1.35%, and OIL at Rs.422.75, down 0.88%.

“We do not see a major impact on the share prices of ONGC and OIL as the market has been anticipating a fall in the price of gas from October and it is factored into the stock,” said Piyush Jain, equity research analyst-energy, industrials and basic materials, Morningstar Investment Advisor Pvt. Ltd.

He said while the share prices of these firms will not reflect the fall in price, ONGC is likely to take a hit on its revenue and margins due to the fall in prices.

ONGC is the biggest natural gas producer in the country and since it has said it will not defer its capex programme for the current year, the fall in gas prices will lead to lower cash flows and, hence, a higher sum has to be diverted from its net profits to fund its capex in its deep water asset, Krishna-Godavari (KG) basin D5 block.

A mail sent to ONGC was not immediately answered.

RIL, which was not allowed to charge a higher price for natural gas produced from its KG D6 block due to its ongoing arbitration with the government on cost-recovery from its fields, is more or less insulated from the fall in price as on net calorific value, the price of gas comes out to be close to $4.2 per mmBtu, which the firm is already charging. Besides, gas is a very small part of its total turnover, Irani pointed out in the note.

Shares of RIL rose 2.54% to close at Rs.860.50 on Wednesday.

By Promit Mukherjee

Source: Live Mint