Cabinet Committee on Economic Affairs to accept the Rangarajan Committee's recommendations

More gain than pain

Anand Kalyanaraman, Businessline

Big hike, big move.

Higher gas prices with some sort of linkage to market rates will help attract investors to the sector.

The decision of the Cabinet Committee on Economic Affairs to accept the Rangarajan Committee’s recommendations will see the price of natural gas produced in India rise to around $8.4 per mmbtu.

The new price, applicable from April 2014, will be double the current rate ($4.2 per mmbtu) being paid for most of the gas currently produced in the country — by public sector explorers ONGC and Oil India, and by Reliance Industries from the KG-D6 block. 

The gas price will be reviewed quarterly based on the formula recommended by the Rangarajan Committee which takes into account price of gas imported into India and international benchmarks. This pricing regime will be applicable for five years. 

The move to hike the price of gas and start aligning it with global rates comes in the face of stiff opposition. The Left parties allege it is being done to favour Reliance Industries, while within the government, the Power and Fertilizers Ministries are worried about the impact on production cost.

But the price hike decision, if followed through, can be a positive game changer for the oil and gas sector. First, it could help staunch declining domestic production and increase gas output by making viable blocks earlier considered uneconomical due to low realisations. 

Higher prices with some sort of linkage to market rates will help attract investors to the oil and gas sector in India. An increase in gas output will also aid utilisation of pipeline capacities which are currently being under-utilised. 

Besides, it could revive many gas-based power plants lying idle for want of fuel. Within the oil and gas sector, there will be more winners than losers from the gas price hike. Below is an impact analysis. 

Very good for gas producers: The biggest beneficiaries should be public sector explorers such as ONGC and Oil India which account for almost 80 per cent of the gas currently produced in the country. According to company officials, the gas price hike will help ONGC increase annual profit by around Rs 8,000 crore, while Oil India’s profit is expected to be higher by around Rs 1,000 crore.

But some of these gains could be lost if the Government decides to impose a higher subsidy burden on these companies. 

This cannot be ruled out, given the fear of burgeoning under-recoveries due to the steep fall in the rupee. Gas output of these public sector companies has been stagnating. Higher prices should hopefully provide a fillip to reverse the trend. 

Reliance Industries, whose gas output from the KG-D6 fields has fallen from a peak of around 60 mmscmd in 2009-10 to less than 15 mmscmd now, purportedly due to technical difficulties, will also get a shot-in-the-arm. 

The company has for a long time now been asking for gas prices to be fully benchmarked to market rates. The Government’s move, while not going the whole hog, should still provide the company big relief. 

Viewed in the context of the company’s planned big investments (around $5 billion) to stem the fall in output and increase production from the KG fields, the price hike comes at an opportune time.

The rate being paid to Reliance is due for revision next year, and the doubling of prices from current levels will not only provide a boost to realisations but also provide an incentive to increase production. 

Already, there is optimism about the prospects of the MJ1 discovery and satellite fields. But given the long time lag between exploration and commercial production, an increase in gas output may take at least a couple of years to materialise. 

A jump in both price and output will also help vindicate the $7.2-billion investment made by global oil and gas major BP for a 30 per cent stake in the domestic oil and gas business of Reliance Industries. 

Other gas producers such as Cairn India and Videocon Industries should also benefit from the increase in price. Besides, players such as Essar Oil which produce coal bed methane gas may benefit. Shale gas, if and when produced in India, will also be priced as per the Rangarajan Committee recommendations. 

Good for gas transporters: For gas transmission major GAIL, an expected improvement in volumes as a result of the price hike should bode well. For the past many quarters, the GAIL stock has been under pressure due to fears of under-utilisation of its expanding pipeline network. On the flipside, higher gas price will increase input costs in GAIL’s petrochemicals and LPG businesses. 

But the management has indicated that the government may compensate this by reducing the subsidy burden being borne by the company on under-recovery on regulated fuels. Net-net, despite short-term pain, GAIL could gain in the long-term from the gas price hike. 

Gujarat State Petronet (GSPL) which has also been on the back-foot due to declining gas transmission quantities should benefit from a possible rise in volumes from the gas price hike. 

Not bad for gas importers: Domestic gas output may improve with higher price. But gas importers and regasifiers such as Petronet LNG should still have a market for their wares, given the huge gap between demand and supply for natural gas in the country. 

Even if domestic gas output picks up, the wide gap between expected demand (above 360 mmscmd) and domestic supply (around 160 mmscmd) by 2017 provides enough room for gas importers.

Not so good for city gas distributors: Companies such as Indraprastha Gas and Gujarat Gas which supply compressed natural gas and piped natural gas in urban areas will see a rise in their sourcing cost. 

But with the cost advantage of natural gas over fuels such as diesel, petrol and LPG, these city gas distributors should be able to pass on a good portion of the cost increase. But margins may still decline, given that the pass-through of costs may not happen to the full extent. 

(This article was published on June 29, 2013)