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ONGC, OIL in a spot over dipping gas prices
Per dollar decrease in gas price will have an impact of Rs 42 billion on its gross revenue, according to ONGC. With the domestic natural gas price dipping by 51 per cent in 24 months to $2.5 per million metric British thermal unit (mmBtu), downstream companies like Oil and Natural Gas Corporation (ONGC) and Oil India (OIL) are now batting for a floor pricing of at least $4.2 per unit, claiming that at current price there will be no margins for producers. According to ONGC, at current volume, per dollar decrease in gas price will have an impact of Rs 42 billion on its gross revenue. On the other hand for OIL India, the loss on revenue is to the tune of Rs 3.50 billion.
ONGC has already requested the government to set a floor pricing or protection pricing insulating it from further drop in international prices. “We have requested the government to set a floor pricing, which is at least equal to the pricing in 2010, which is $4.2 per mmBtu. One dollar decrease in gas price will have an impact of Rs 42 billion on our gross revenue and Rs 24 billion post tax per annum,” said A K Srinivasan, director (finance) of ONGC.
According to Srinivasan, the average cost of production for the company comes to about $3.5 per unit, which will zoom to $ 5 per unit, if returns are also taken into account. It was in June 2010 that the government increased the prices of natural gas to $4.2 per unit, which continued till November 2014 till a formulae suggested by a panel led by C Rangaranjan. Echoing his words, OIL chairman and managing director Utpal Bora said, “At current prices of $2.5 per unit, we are left with zero margins and you need profits to invest in our future projects.”
However, government was not keen on responding to the demands by the companies. Addressing the media on Wednesday, petroleum minister Dharmendra Pradhan hinted that rather than thinking about protection pricing, companies should focus on more innovations. “When Rangarajan formulae 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, domestic natural gas price has dropped four times from $5.1 per unit to $2.5 per unit now. After the Rangarajan formulae was implemented, the prices were first fixed in at $5.1 per unit on gross calorific value basis on November 2016, this got revised again on April 2015 to $4.7 per unit.
The prices again dropped in October 2015 to $3.8 per unit and further to $3.1 per unit on April 2016. This again dropped for the fourth time, in tandem with the international prices on October 2016 to $2.5 per unit. As per the current formulae, prices are revised after every six months and calculated on the basis of a weighted average of rates in countries like the US, Canada and Russia, based on the 12-month trailing average price with a lag of three months. However, the companies are upbeat about the future of gas price. “The prices 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 standalone credit profile of ‘BBB-‘, although the company’s upstream gas operations will incur losses. “We expect that the price of $2.50 per mmBtu to be just sufficient to cover the costs of bringing the gas to the surface and that OIL will incur cash losses due to taxes and levies. Fitch estimates are duction in gas price by $0.5 per mmBtu will result in about a INR2.5bn fall in EBITDA over the next six months for OIL,” Fitch Ratings added. Gas accounts for about 40 per cent of the company’s total oil and gas production in terms of barrels of oil equivalent. Jack Johnson Jersey
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