Govt slashes domestic natural gas price by 25 percent to $1.79/mmBtu

The Union government has cut the price of domestic gas by a sharp 25.1% to $1.79 per million British thermal units (mmBtu) as higher production and coronavirus-induced low demand has suppressed global gas prices. The new price will be effective for six months starting October 1.

This is the third straight cut after the government, in September 2019, lowered domestic natural gas prices by 12.5% to $3.23/mmBtu. The domestic gas price is linked to the weighted average price of four global benchmarks (US, UK, Canada and Russia). Spot US LNG prices have fallen more than 21% in the last six months to $1.5/mmBtu.

Lower prices will add to the pressure of state-run Oil and Natural Gas Corporation (ONGC) — which produces about 80% of the domestic natural gas — as its average output cost of $3.7/mmBtu is twice the current price. The company is also grappling with under-recoveries stemming from low crude prices.

CARE Ratings had earlier noted that gross production of domestic natural gas will fall by 10.6% during FY21 as “no company would aggressively want to increase production or get into high-risk projects with such a low gas price”.

Fall in natural gas prices will be positive for the fertiliser and the city gas distribution (CGD) companies. Indigenous natural gas production caters to about only 51% of the country’s requirements. Demand for natural gas in the domestic market is largely dependent on the fertiliser (28%), power (23%), CGD entities (16%), refineries (12%) and petrochemicals (8%) industries. The country aims to increase the share of natural gas in its energy mix to 15% by 2030 from the current level of about 6%.

“Completion of Indian gas grid, jump in LNG import capacity, rise in domestic gas output, rapid CGD expansion and court orders to replace polluting fuels with gas are set to boost India’s gas consumption,” ICICI Securities said in a recent report.