The government’s decision to limit prices of domestic natural gas from legacy fields to between USD 4-6.5 per million British Thermal Unit (mmbtu) will support margins for city gas distributors, encourage the use of gas, and reduce cash flow volatility for upstream producers, Fitch Ratings said on Wednesday.
“We expect a partial pass-through of the lower administered price mechanism (APM) gas prices, at which domestic upstream producers supply gas to city gas distributors, in the prices of compressed natural gas (CNG) and domestic piped natural gas (PNG) to add to the distributors’ margins in the near term,” it said in a statement.
City gas retailers like Indraprastha Gas Ltd and Adani Total Gas Ltd last weekend announced Rs 6-8 cut in CNG and PNG prices, reflecting the cut in input gas prices.
The APM price under the new regime was calculated at USD 7.92, but is capped at USD 6.5 for the rest of April, 24 per cent below levels in October 2022-March 2023.
“We expect such price cuts by city gas distributors and the fixing of a price ceiling to add certainty to domestic natural gas’ price advantage relative to alternative fuels, supporting gas usage for transportation and households, and overall demand in the medium term,” Fitch said.
The revised mechanism dovetails with India’s target of increasing natural gas’ share in its energy mix.
“We expect the price floor and ceiling to reduce the volatility in cash flows from gas production for Oil India Limited (OIL) and Oil and Natural Gas Corporation Limited (ONGC). The floor is higher than APM prices over 2015 to 2021 while the ceiling is below current market prices,” it said.
Gas sales accounted for 9-11 per cent of OIL’s and ONGC’s standalone revenues in the financial year ended March 2022 (FY22), and the legacy fields account for the majority of their gas production.
Financial buffers built by OIL and ONGC over the last 18 months, when industry conditions were favourable, will help them to absorb the near-term reduction in APM prices, Fitch said, adding that it expects the cut in gas prices to ease inflationary pressure in the economy, with domestic gas accounting for 55 per cent of India’s gas consumption in the first nine months of 2022-23 fiscal.
