Rangarajan committee recos: How will it Impact O&G stocks?

Rangarajan committee recommends price and production linked bidding and revenue sharing with the govt as against current practice based on cost recovery.

Recommends gas pricing based on average netback price of Indian LNG import at the wellhead of the exporting countries and weighted average price of US, UK and Japan markets

If gas pricing proposal implemented it would be positive for RIL in the medium-term. However, ONGC and OIL too would get benefited in the long run. Negative for GAIL Rangrajan committee has submitted its report to PMO. The recommendations are mainly focused on two aspects 1) Existing Production Sharing Contracts (PSC) and its structure 2) Gas pricing formula.

Some of the Key recommendation

1) On PSC
i) Sharing of Revenue with the government without offsetting cost As per current terms of PSC, the contractor is first allowed to recovery its capex first and after that the sharing with government starts. However the proposal recommends government sharing starts from day 1 of production and is linked to production volumes.

Impact on players/contractors - Negative
Our take This recommendation has been made in response to the issues witnessed in the case of RIL’s KG basin, wherein CAG has claimed that there was cost escalation in view of the declining in gas production. With the new proposal government intends to discontinue the priority given to contractors to recover their cost, only post which the government sharing starts based on the concept investment multiple. Any such change will only be effective prospective and is negative for contractors compared to current regulation.

(ii) To boost the overall investment in E&P space;  committee recommended increasing the tax holiday from 7 years to 10 years.

(iii) Bidding criteria in the proposed new system:

(a) Companies will be required to bid for the Government share of production, after royalty, as per the matrix provided. The bid has to be made separately for oil & gas cases.

(b) The production share for each combination of price-class and incremental productiontranche in the matrix would be biddable by the Contractor. The bid has to be progressive and incremental in terms of the Government take, i.e., the Government take will be in ascending order for corresponding increases in production and price. Thus, under the proposed system, Government take will be progressive with respect to both production and prices.

(c) Bidding in constant terms or fractional bidding will not be permitted.

Bid evaluation criteria (BEC):
(a) Government NPV @ 10% will be calculated for each price band separately for oil & gas only for the Government production share offered (excluding royalty and income tax) and summed up.

(b) Government NPV will be calculated on benchmarked production profile.

(c) Highest oil & gas price of each band and US $ 140 / Bbl for oil and US $ 12 / MMBtu for gas (as the case may be) for the highest tranche will be used for calculating Government NPV.

(d) Company offering highest NPV @ 10% combined for oil and gas can be awarded highest score on the fiscal package in the process for award of the block.

Downstream sectors to take a hit
Any increase in domestic prices would negative impact the downstream consuming sectors, predominantly power and fertilizer sectors. While power generation cost would increase necessitating an increase in power tariffs, increase in feedstock cost for fertilizer sector would lead to increase in governments outlay on fertilizer subsidy. Currently power and fertilizer combined consume Currently power and fertilizer sectors combined consume about 2/3rd of domestic gas. For other industries which consume domestic gas as fuel the alternative fuel choice is liquid fuels. As a result any increase in domestic gas price is not likely to affect its competitiveness vis-à-vis other liquid fuels.

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