Icra: Govt weighing floor price for domestic gas over falling prices

The government is considering a floor price for domestic gas to protect producers from revenue loss in the wake of declining domestic gas price, ratings agency Icra has said. The government fears that not protecting upstream gas producers may dampen the prospects of new gas projects.

According to Icra, Asian spot prices of LNG fell to below $2/mmBtu in May owing to the drop in demand due to the Covid-19 pandemic. Domestic gas price, notified at $1.79/mmBtu (GCV basis) in the second half of the current fiscal, is 25.1% lower than that of $2.39/ mmBtu in the first half.

The Centre has announced a ceiling on price for gas produced from deep water, ultra-deep water, high temperature and high-pressure fields at $4.06/mmBtu for the second half, which is 27.6% lower than the price of $5.61/mmBtu during the first half of the fiscal.

K Ravichandran, senior vice-president and group head, Corporate Ratings, Icra, said, “At such low prices, gas production becomes loss-making from most fields of the Indian upstream producers, despite the fact that there has been some decline in the cost of oil field services and equipment costs. The appreciation of the Rupee against the US dollar in the past few months has further dampened realisations. In the near to medium term, poor returns will continue with an absence of a floor price. Sustained low prices will make exploration and production unviable even for benign geologies.”

The upstream sector is already grappling with low oil prices, and low natural gas price is an added blow, Icra said, adding “though [the government] is reported to be considering a floor price for gas, there is no clarity on the implementation of the same.”

Icra said the recent global trend shows recovery in price to $4.5-5/mmBtu owing to decline in supply as some plants are idle in the US and some are shut for maintenance in Australia. Higher demand is expected in winter, but there will still be a supply overhang, with about 29 million tonne of liquefaction capacity added in calendar year 2019 over 37 million tonne added in 2018.

Additionally, global GDP, expected to shrink, will mute the demand growth of natural gas in the near term. Additionally, low oil prices will also weigh on LNG price.

From the consumers’ perspective, the decline in domestic gas price has lowered fuel cost by about 20% for domestic gas-based power generators. Given the nature of power purchase agreements, the benefit is expected to be passed on to the consumers, mainly state distribution companies.

But subdued utilisation of gas-based power plants, with annual average plant load factor of 22-25%, will limit this benefit. On the other hand, the relatively low spot R-LNG prices have benefited some of the gas-based power generation projects using imported R-LNG. For every US$ 1/mmBtu of a dip in gas price, the cost of generation would reduce by 60-65 paise per unit for gas-based power generation projects at the prevailing rupee dollar exchange rate.

Additionally, the fertiliser sector will benefit, since nearly 41% of the gas requirement of the sector is met through domestic gas, while the remaining is met through R-LNG imports, Icra said. The fertiliser industry is supplied gas at pooled pricing, which takes into account weighted average of domestic R-LNG prices. The revision in the domestic gas price will lead to a reduction of $0.25/mmBtu in the pooled price, and the fertiliser sector is expected to get it in the range of $7.5-8/mmBtu in the near term. Low gas prices will lower the cost of production and thus the subsidy requirement would be low to the extent of Rs 11,000 crore, according to Icra estimates.

Ankit Patel, vice-president and co-head, Corporate Ratings, said the sale volume of city gas distribution players has been down due to the pandemic, but the third consecutive reduction in gas price should result in a cut in domestic CNG and PNG prices. CGD players could cut domestic CNG and PNG prices by Rs 2.2-2.4/kg and Rs 1.5-1.7/scm respectively.