The price hike announced by the Government on Saturday for domestically produced natural gas is unlikely to cheer either the PSU majors ONGC and Oil India or the private sector behemoth Reliance Industries. This is because the new price of $5.61 a unit is lower than what reports had suggested ($6-6.50) as also that arrived at by the Rangarajan panel formula (about $8.4).
This is primarily because the Government has excluded the Japanese and Indian LNG import price; these components have a higher cost than many other global benchmarks given the demand-supply dynamics in Asia. Under the new formula, the price will be revised on a half-yearly basis (the next revision is on April 1, 2015) instead of every quarter, as recommended by the Rangarajan Committee.
The new price, based on the gross calorific value, translates to about $6.17 a unit on net calorific value basis, nearly $2, or 47 per cent, more than the current $4.2 on net calorific value basis.
Yet, explorers will be disappointed. Under the Rangarajan formula, ONGC’s annual profit would have been ₹8,000 crore higher, and Oil India’s about ₹1,000 crore more. Under the new formula, ONGC’s profit could be up by ₹4,700 crore and Oil India’s by ₹600 crore. ONGC and Oil India account for nearly 80 per cent of the natural gas produced in India.
It is also unlikely that the new price will incentivise high-risk deep/ultra-deep-water exploration. While the Government has said that it will pay a premium for discoveries in deep/ultra-deep waters and high-pressure temperature areas, it has not spelt out the quantum.
RIL bears the brunt For Reliance Industries, the price hike benefit is not likely to kick in anytime soon. This is because it will be paid $4.2 a unit until its dispute with the Government over the production shortfall in the KG-D6 field is settled. So, while RIL’s customers will pay $5.61 a unit from November 1, the company will get only $4.2 with the excess credited to a gas pool account maintained by GAIL.
RIL had been unhappy even with the $8.4 a unit mooted by the Rangarajan panel and was pitching for arm’s-length based market-linked pricing. So, the lower new price and denial, for now, of this benefit come as a double-whammy. Also, the premium on deep/ultra-deep-water blocks will apply only to new discoveries, not operational fields.