ONGC and Oil India chafe at decrease in gas price

With the domestic natural gas price dipping by 51 per cent in 24 months to $2.5 per million British thermal units (mBtu), downstream companies Oil and Natural Gas Corporation (ONGC) and Oil India (OIL) are batting for a floor price of at least $4.2 a unit.

At the current price, they say, there will be no margins for producers. According to ONGC, at the current volume, the per dollar decrease in price will have an impact of Rs 4,200 crore on its gross revenue. OIL’s loss on revenue is Rs 350 crore.

“We have requested the government to set a floor price, at least equal to the pricing in 2010, of $4.2 per mBtu. Every one dollar decrease in the gas price will have an impact of Rs 4,200 crore on our gross revenue and Rs 2,400 crore post tax per annum,” said A K Srinivasan, director (finance) of ONGC.

He says their average cost of production is $3.5 a unit; if returns are taken into account, $5 a unit.

It was in June 2010 that the government allowed gas produced by ONGC and OIL to be benchmarked at $4.2 per unit, a price which Reliance Industries got for its KG-D6 gas. This continued till November 2014, when a new gas pricing formula — which sets the price for a six-monthly period — had replaced it.

Since November 2014, the government adopted a new gas pricing formula, which sets the price for a six-monthly period. Says OIL chairman Utpal Bora, “At the current $2.5 a unit, we are left with zero margins. You need profits to invest in future projects.”

However, the government is not keen on these demands. Addressing the media on Wednesday, Petroleum Minister Dharmendra Pradhan hinted that rather than thinking about protection pricing, the companies should focus on more innovation.

“When the formula was adopted by us in 2014, these market fluctuations were taken into account. The pricing will continue as per that formula only,” Pradhan added.

Since November 2014, the domestic natural gas price has dropped four times, from $5.1 a unit to $2.5 now. After the formula was implemented, the price were first fixed at $5.1 a unit on a gross calorific value basis, revised in April 2015 to $4.7 a unit. The price again dropped in October 2015 to $3.8 a unit and to $3.1 a unit in April 2016. Then, in line with international prices in October, to $2.5 a unit.

In the current formula, prices are revised every six months. The calculation is on the basis of a weighted average of rates in the US, Canada and Russia, based on the 12-month trailing average price, with a lag of three months.

However, the companies say they’re upbeat about future prices. “These are bound to come up. Once it increases, we will be reaping benefits as well,” Srinivasan added.

According to Fitch Ratings, the cut in prices will not have a significant impact on OIL’s standalone credit profile of ‘BBB-’. However, the company’s upstream gas operations will incur losses. “We expect the price of $2.50 per mBtu to be just sufficient to cover the cost of bringing the gas to the surface and that OIL will incur cash losses due to taxes and levies. Fitch estimates a reduction in gas price by $0.5 an mBtu will result in a Rs 250-crore fall in Ebitda over the next six months for OIL.”

Gas accounts for about 40 per cent of the company’s total oil and gas production in terms of barrels of oil equivalent.