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Home | Business | Upstream Producers Continue To Bleed As Domestic Gas Prices Remain Low

Upstream producers continue to bleed as domestic gas prices remain low

The agency cited that low prices may be unfavourable for domestic producers, it will benefit gas consumers.

By IANS
Published Date - 02:26 PM, Sat - 3 April 21
Upstream producers continue to bleed as domestic gas prices remain low
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New Delhi: Low natural gas prices have adversely impacted upstream producers’ revenues, profitability and cash accruals, ratings agency ICRA said.

Accordingly, domestic gas price notified at $1.79 per mmbtu (GCV basis) for the period H1 FY2022 remains the lowest since the institution of the modified ‘Rangarajan’ formula.

The agency cited that low prices may be unfavourable for domestic producers, it will benefit gas consumers.

Besides, it said that consumers will benefit in the long run from the expectations of continued supply overhang.

As per an ICRA note, at such low gas prices, gas production remains a loss-making proposition for most fields for the Indian upstream producers notwithstanding some decline in oil field services or equipment costs.

However, the depreciation of ‘Indian Rupee (INR) against US$’, would aid in the realisations of the gas producers but only to an extent.

“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,” said Sabyasachi Majumdar, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA.

“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 make exploration and production unviable even for benign geologies… the incumbents have petitioned the GoI to provide a floor price for gas prices.”

In terms of consumers’ perspective, the note pointed out that low domestic gas price is a positive.

“The continuation of the low domestic gas prices would lead to a competitive cost of generation for the domestic gas-based power generation projects. Given the cost-plus nature of the PPAs tied-up by the gas-based power projects, the benefit is expected to be passed on to the customers, mainly the state distribution utilities (discoms).”

“However, the extent of the benefit would be limited for the discoms, given the subdued utilisation of the gas-based power plants in the country with annual average PLF of 22-25 per cent for the gas-based capacity at all India level, amid the inadequate supply of domestic natural gas.”

According to the report, the pool price for the fertiliser sector is expected to remain in the range of $9.5-10 per mmbtu for FY2022, if the crude oil prices sustain at current levels.

The fertiliser sector is supplied gas at pooled pricing, which takes into account the weighted average of the domestic and R-LNG prices.

“With no change in the domestic gas price, the pooled gas price will not witness any upward bias although term LNG prices have risen over the last couple of months with the strengthening of the crude oil prices.”

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