The government has raised natural gas price by 6 per cent to its highest level in two years, a move that will result in higher CNG and cooking gas prices.
The price paid to most of natural gas produced from domestic fields will be USD 3.06 per million British thermal unit (mmBtu) for six months, beginning April 1, from current USD 2.89, according to a notification issued by oil ministry's Petroleum Planning and Analysis Cell.
Natural gas prices are set every six months based on average rates in gas-surplus nations like the US, Russia and Canada.
India imports half of its gas which costs more than double the domestic rate.
This is the second straight increase that would take the rates to their highest level since April-September 2016 when a similar price was paid to domestic producers.
The increase in price will boost earnings of producers like Oil and Natural Gas Corp (ONGC) and Reliance Industries (RIL), but will also lead to a rise in the prices of CNG and piped cooking gas, which use natural gas as input. It would also lead to higher cost of urea and power production.
Also, the ceiling on price for gas produced from new fields in difficult areas like deep water, ultra deep water, high temperature and high pressure fields has also been raised to USD 6.78 per mmBtu for April to October 2018 period, up from current price ceiling of USD 6.30.
The hike would increase the cost of domestic gas-based power generation by about 3 per cent. It would also result in an increase in CNG and piped cooking gas prices by 50-55 paise per and 35-40 paise per standard cubic meter, respectively.
But for gas producers like ONGC, it will result in more revenues. Every dollar increase in gas price results in Rs 4,000 crore additional revenue for PSUs on an annual basis. ONGC is the country's biggest gas producer, accounting for more than 70 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.
Gas price was last hiked to USD 2.89 per mmBtu for October 2017 to March 2018 period from USD 2.48 in the previous six months. This was the first hike in nearly three years.
Commenting on the development, Icra said the increase "is expected to provide some succour to (gas) producers."
"Nevertheless, the revised gas price still remains at break even or 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," it said in a note.
Additionally, the appreciation of the Indian rupee against the US dollar in FY2018 also dampens the realisations of the gas producers.
"The absence of a floor and sustained low prices, as has been seen in the past few years post implementation of the modified Rangarajan formula, make exploration and production unviable even for benign geologies and would act as a deterrent in achieving a higher share of gas in the energy consumption of the country targeted by the government of India," Icra said.
The issue of such low prices for a sustained period would have to be addressed on a priority basis in order to incentivise domestic production and balance the interest of upstream producers with consumers, it said, adding that the ceiling price for difficult fields too is not lucrative enough.
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.Rates according to this formula are revised every six months - on April 1 and October 1, 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 September is based on average price at the international hubs during January to December, 2017.