Relief for RIL & ONGC – Govt., Likely to Approve Higher Gas Prices

The Oil & Gas sector in India isn’t the most promising of the lot. Add to this the crippling shortage of gas the country faces and the cringe worthy fact India still imports 25-30% of its needs at $12-15 per million British Thermal Unit (mmBtu). On Friday 6th June though, the Ministry of Petroleum, a core part of the Government of India recommended a hike in prices paid to local suppliers such as ONGC, Reliance Industries (RIL) and Cairn. The move is in keeping with the December 2012 recommendations of the Rangarajan committee. Based on the formula, today’s price will be in the $8.50-9 per mmBtu.

The approval for raising these prices has been pending since the start of year when the UPA was in charge. However, with the elections, things obviously got delayed. The likely approval and as such, implementing the Rangarajan formula is the top item of the presentation to be made by the petroleum ministry to Prime Minister Narendra Modi any time over the next few days. Insiders remain tight-lipped about the fact that the petroleum ministry may have to go to the cabinet.

The Biggest Beneficiary – Govt., of India:

The rise in gas prices when first suggested by the Rangarajan committee surprised a lot of people and popular perception was an imminent price rise with respect to various commodities. Also, some elements have been responsible for suggesting that this will raise electricity and fertiliser prices. This is not true at all! For one, the biggest beneficiary of the rise in gas prices will be the Government of India. The Centre stands to gain more royalty/cess and hence, can subsidize the affected sectors such as electricity.

Also, India’s gas imports are estimated to rise from the 25-30% levels now to 42% in FY17. Even though GAIL’s gas from the US is priced at the Henry Hub price of $4.50, once liquefaction, degasifying and transport costs are added, the price will be $11-12 per mmBtu.

Benefit for Local Players:

At the end of the day though, the government and any entity involved in such a decision-making process understands that raising the gas prices to $9-10 will be cheaper than importing gas, which is the only other alternative. A study by global consulting firm IHS Cera says 85% of India’s natural gas is viable only at prices above $10 per mmBtu — ONGC, for instance, has asked for a price of $13 if it is to develop its Mahanadi block. Even then, there is no sign of complaint from RIL about the $8.5 suggested price.

The other benefit is that of increased capital. If the gas price hike is approved, an investment of $15-20 Crores can be expected over the next few years. In fact, RIL is again leading the charge in this case. The Mukesh Ambani owned company has committed to invest $8-10 billion over three to four years.

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