Prime Minister Narendra Modi’s push for raising indigenous output is likely to take a hit as natural gas production is no more a profitable business and gas majors in the country are incurring heavy losses as the Government-mandated gas price is significantly below the cost of production.
ONGC Chairman and Managing Director Dinesh K Sarraf said on Friday the company lost Rs5,010 crore in revenue in the natural gas business, and about Rs3,000 crore in profit in the last one year because of cuts in gas prices. “Natural gas is no more a profitable business because cost of production is significantly higher than current gas prices. The price paid to domestic producers is less than half of the rate paid for import of gas or lNG,” he added.
The ONGC Chairman is of the view that for any company it does not make economic or commercial sense to invest in new fields or in augmenting production from existing ones through fresh investment if the price it will get is below the cost of production.
As soon as the BJP-led Government came to power in 2014, it evolved a new pricing formula in October, using rates prevalent in gas surplus nations like the US, Canada and Russia to determine rates in a net importing country. The gas prices have halved to $2.48 per Million British Thermal Unit (MBTU) since the formula was implemented.
India currently imports half of its natural gas from other countries and Prime Minister Narendra Modi is keen on cutting the import bill by raising indigenous output in the country through the ‘Make in India’ initiative.
Sarraf said ONGC has also sought a review of the natural gas pricing formula. India’s largest natural gas producer is demanding that floor or minimum price of natural gas be fixed at $4.2 per MBTU for the business to make economic sense. “We have no reason to disbelieve that gas prices will not be raised,” he added.
“Keeping in view cost of gas production, cost of alternate fuels and other market dynamics, Ministry of Petroleum and Natural Gas is requested to review the existing domestic gas price formula and provide a floor price at least to the level of earlier APM (regulated) price ($4.20 per MBTU)/ non-APM price ($4.20 to $5.25 per mmBtu) fixed in June 2010,” ONGC said in a recent communique.
The new formula provides for revising rates every six months - on April 1 and October 1, based on one-year average gas price in the surplus nations with a lag of one quarter. When the formula was implemented, rates went up from $4.2 to $5.05 per mmBtu but fell to $4.66 per mmBtu in April 2015 and to $3.82 in October that year. It further dipped to $3.06 per mmBtu in April 2016 and to $2.50 per mmBtu in October 2016. In April this year, it further fell to $2.48 per mmBtu.
Oil Minister Dharmendra Pradhan, in a written reply to a question in lok Sabha on March 20, had stated that the cost of production of natural gas in the prolific Krishna Godavari basin is between $4.99 per mmBtu and $7.30 per mmBtu.