Cheaper gas: why, how, and what’s in it for you

By how much has the price of natural gas gone down? Is this unusual? How are gas prices determined?

The government announced on Wednesday that domestically produced natural gas would be priced at $ 3.82 per million British thermal units (mmBtu) on gross calorific value (GCV) basis for the second half of the fiscal year 2015-16, that is, from October 2015 to March 2016 end. This is a reduction of 18% over prevailing prices, which came into effect on April 1. Prices of locally produced natural gas are revised every six months as part of a new system of gas pricing initiated in October 2014. As such, this is a scheduled price revision, and is in line with the fall in market prices of natural gas across the world. According to the new formula, domestic prices are a function of the prices of locally produced gas in four key markets of the world: National Balancing Point (UK), Henry Hub (US), Alberta Hub (Canada) and Federal Tariff of the Russian government.

Are Indian prices different from other countries’? Are they higher or lower?

Indian prices are a weighted average of the four main markets. The volume of gas consumed in the corresponding markets weights the prices. As such, Indian prices are not exactly the same as those in any one market. However, the bi-annual revision ensures that Indian prices move in sync with global benchmarks.

Who gains from the lower prices? By how much?

Consumers of natural gas, including common people, will gain from the cheaper availability of compressed natural gas (CNG) and piped natural gas (PNG). According to India Ratings and Research, the benefit from reduced prices will be partly offset by the near 6% depreciation of the rupee over April-September 2015. Even so, the net impact of reduced domestic gas prices, in rupee terms, would range between 11% and 16%. The move is likely to result in a cut of Rs 2.1-2.3/scm (standard cubic metre) in PNG prices, and Rs 2.8-3.0/kg reduction in CNG prices. Retail prices of both CNG and PNG were cut on Thursday. Companies in the business of gas distribution will benefit too. Shares of these companies rose on Wednesday — Indraprastha Gas was up 3.7%, Gujarat Gas gained 2.76%, Gujarat State Petronet 1.42% and Petronet LNG 1.16% on the BSE. Impact on government finances is likely to be mixed. The government will gain due to a reduction in the subsidy burden on account of urea, but will lose out on income from state-owned producers of gas.

Who will lose out due to lower prices?

Producers of domestic gas like ONGC Ltd, Oil India Ltd and Reliance Industries Ltd will be impacted adversely. India Ratings and Research estimates that ONGC will see its revenues decline by Rs 10.8 billion-11.5 billion, and OIL by Rs 1.2 billion-1.3 billion.

Source : Indian Express, 2nd October 2015



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