Natural gas price hike to boost margins at OIL, ONGC, GAIL – India Ratings

The recent gas price increase will improve the profitability of gas production operations of Oil India and ONGC, India Ratings said, while also benefiting transporter GAIL.

“Although producers have been benefiting from lower rig and vessel rentals for renewed contracts due to soft crude prices, the operating cost remains close to realisations from its sale,” said the ratings agency. “Hence, this increment would bolster domestic producing companies’ margins.”

It said the biggest beneficiaries would be the public sector units Oil India Limited and Oil and Natural Gas Corporation Limited which contribute around 80% to the total domestic production.

It estimated that the increased price would generate Rs 13 billion of extra revenue for Indian domestic producers during Oct-Mar.

Gail (India) could see about Rs 15 billion higher trading revenue from the sale of domestic gases during the same period, it added.

The government of India has increased domestic natural gas price by around 17% to $2.89/million British thermal units for October 2017–March 2018.

This is the first upward price revision after five consecutive domestic gas price reductions.

Gas price used to be around $4.2 per MMBTU in 2014, when oil prices used to be at around $130 per barrel.

Since then, India gas prices were brought down by 50%.

Recently, natural gas prices have increased internationally.

The average Henry Hub gas prices increased by 19% to USD3/mmbtu for the current reference period of July 2016- June 2017 compared to USD2.52/mmbtu for the previous reference period of January-December 2016.

The higher prices would impact consumers, said India Ratings.

“The burden of price increase.. is usually passed on to the customers.

The revised price means CGD entities would entail INR1.05 higher cost per scm on gas procurement.

“The non-subsidised and subsidised LPG prices are around 33% and 9%, respectively, costlier than the domestic PNG in Delhi.

“Similarly, CNG is around 60% more competitive than petrol and around 50% than diesel,” it said.

“Given the significant competitiveness of CNG and PNG (domestic), city gas distribution entities could raise the prices of these fuels by Rs 1-1.4/kg and Rs 0.8-1.0 per cubic meter respectively,” it added.