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ONGC To RIL’s Short-Term Realisations May Take A Hit On New Gas Pricing Norms
Revised norms for legacy administered price mechanism fields will impact the short-term realisation of upstream companies even though it be higher than the historical average, according to analysts.
The revision is expected to eventually provide stability to upstream companies—such as Oil and Natural Gas Corp. Ltd., Oil India Ltd. and Reliance Industries Ltd.—and city gas distribution firms to withstand extreme price volatility witnessed in the past.
The price of APM gas—that was linked to four global gas hubs—had seen extreme volatility in the last seven to eight years. It touched a low of $1.5 per metric million British thermal unit in 2015 and 2021, and witnessed a high of $8.57 per mmBtu for the six-month period ending March 2023.
Global gas prices have seen greater volatility since February last year on account of the ongoing Russia-Ukraine conflict. However, under the revised norms, the prices have been linked to 10% of the average of the Indian basket of imported crude. It will have a floor price of $4 per mmBtu and a ceiling of $6.5 per mmBtu.
“This would balance the interest of domestic gas producers, in case of extreme volatility, while incentivising the city gas consumers.” said Crisil Ratings in a note. The net realisation, or average selling price per unit, for upstream oil and gas companies like Oil and Natural Gas Corp. is expected to fall by $2 per mmBtu or Rs 6 per standard cubic metre. But it would continue to remain above historical averages, ICICI Securities said in a report.
Similarly, for Reliance Industries—which doesn’t have many legacy fields—the decline in realisation will be on account of reduction in the price of high-pressure high-temperature gas on April 1. “RIL’s net realisation is expected to come down by $0.35 per mmBtu or Rs 1/scm, but would still continue to remain above historical averages,” the ICICI Securities report said.
The price of HPHT gas was reduced to $12.12 per mmBtu from $12.46 per mmBtu on April 1 by the Ministry of Petroleum and Natural Gas. However, the price of HPHT gas will not be part of the new norms and it will be reviewed separately.
According to Nirmal Bang, the decision to withdraw windfall tax was intended to compensate PSU upstream companies for a cut in gas realisation in the event of new natural gas pricing norms.
“Any future levy of additional excise duty/cess on motor spirit and high speed diesel, in the event of a secular decline in crude oil, could also improve the savings on CNG versus alternative auto fuels. Such a penal tax could be justified by the government on the grounds of penalising polluting fuels as well as to shore up revenues,” it said in a report.
For PSU upstream companies, this policy change is more structural and shows the government’s intent to make ONGC and OIL’s gas business sustainable, said Sabri Hazarika, senior oil analyst with Emkay Global Financial Services.
The $4 per mmBtu floor price is higher than the $3-3.5 per mmBtu production cost, while the $0.25 annual escalation in cap would aid in gas markets’ complete deregulation in the long run, Hazarika said.
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