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Low gas prices to impact financial performance of upstream oil and gas companies
The domestic natural gas price notified at $1.79 per unit for the first half of 2021-22, lowest since the institution of the modified Rangarajan formula, is unfavourable for domestic oil and gas producers and will significantly impact their financial performance, according to ICRA.
At such low gas prices, gas production remains a loss-making proposition for most fields for the upstream producers notwithstanding some decline in oil field services and equipment costs, the rating agency said.
The absence of a floor and sustained low prices as has been seen in the past few years post implementation of the modified Rangarajan formula makes exploration and production unviable even for benign geologies, it said.
“Accordingly, low natural gas prices remain negative for the upstream sector adversely impacting revenues, profitability and cash accruals and the incumbents have petitioned the GoI to provide a floor price for gas prices,” said Sabyasachi Majumdar, Senior Vice President at ICRA.
He added that going forward, the supply glut is expected to keep prices of domestic gas low in the near-to-medium term leading to poor returns even as domestic gas producers such as ONGC and RIL-BP ramp up gas production significantly.
Also, the ceiling on price for gas produced from deep water, ultra deepwater, high temperature and high-pressure fields has also been announced at $3.62 per unit for the period between April and September 2021, 10.8 per cent lower than the price ceiling of $4.06 per unit for the period between October 2020 and March 2021. This would dampen the development of such projects.
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