RIL May Charge Market Prices For Natural Gas, As Per the 12th Five year Plan

The 12th five-year plan may come as a relief to Reliance Industries, India’s leading private sector company and energy giant. The prime minister, who is in charge of this plan, has permitted natural gas producers like Reliance to levy market prices, unlike the earlier policy that restricted companies from the same. The National Development Council (NDC) made an official announcement stating that the market forces will determine the prices of natural gas charged to the producers.

Presently, the natural gas produced in the country is priced at USD 4.2 per million British thermal unit, in most of the cases. However, this price is just a third of imported LNG (Liquefied Natural Gas). It is observed that the Rangarajan Committee suggested that the gas price is ascertained based on the weighted average of other international benchmark, making it possible for the producers to capitalize. However, this policy may come into effect only after the 2014 elections.

Goldman Sachs analysts claimed that the new change in the policy would lift the domestic gas price to $8.1/mmBtu (million metric British thermal unit) vis-à-vis the present price range of $2.52-5.65/mmBtu and two times more than the current price range of majority of the domestic gases i.e. $4.2 mmBtu. RIL along with its partner BP Plc have been for long, demanding the government to comply with the market price for natural gas, produced from their KGD6 fields.

Supporting the change in the policy, the Prime Minister stated that the price of natural gas in the country is much lower than the international price range. He also mentioned that there will be no effort involved in leveraging energy or maximizing its supply, if the present scenario prolongs where the domestic energy prices are much lower.

The 12th year plan also mentioned that the current fiscal would witness a tremendous increase in the demand for the natural gas from the present 194 million standard cubic meters to 286 mmscmd. It also estimated this demand to increase to 466 mmscmd by 2016-2017.

Analysts believe that this policy will have an immediate positive effect on RIL’s stock wherein every $ 1/mmBtu rise in gas price will lead to a 3% increase in its FY 15E EPS.

RIL had earlier written to the Oil Ministry, opposing uniform marketing margin for natural gas given that there is a huge disparity in the associated costs and risks taken into consideration by different agencies.

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