With the government reducing domestic gas prices by 18 percent to USD 3.82/mmbtu — applicable from October 1, 2015, to March 31, 2016 — end consumers have much to rejoice. India Ratings expects compressed natural gas (CNG) and piped natural gas (PNG domestic) prices to be revised downward. It further expects a Rs 2.1-2.3/scm cut in PNG prices and Rs 2.8-3.0/kg reduction in CNG prices.
This will make CNG 44-45 percent more competitive than diesel, compared with 39 percent currently, while PNG would become 1-2 percent more competitive than subsidised LPG, compared with a negative 8 percent currently, the ratings agency states.
Over April-September 2015, diesel price declined by 8 percent, while that of CNG remained unchanged, thus lowering the fuel competitiveness of CNG. This is the second domestic gas price reduction and is driven by the decline in average gas prices prevalent at the reference hubs over the period July 2014-June 2015, the report states. The first downward price revision was to USD 4.66/mmbtu (million British thermal unit) from USD 5.05/mmbtu on April 1, 2015.
The average Henry Hub gas prices declined to USD 3.33/mmbtu from USD 4.35/mmbtu over January-December 2014.
The government announced on Wednesday that natural gas prices, according to a formula approved by the government in October last year, will fall to USD 4.24 per million British thermal unit on net calorific value (NCV) basis from the current USD 5.50 per mmBtu. On gross calorific value (GCV) basis, the new gas price for October 1 to March 31 would be USD 3.82 per mmBtu as compared to USD 4.66 currently, officials said.
However, India Ratings says the benefit from reduced gas price will be partly offset by the near 6 percent rupee depreciation over April-September 2015. Thus, the net impact of the reduced domestic gas prices in rupee terms would be nearly 11-16 percent.
The steepest ever reduction will, however, hit producers like state-owned Oil and Natural Gas Corp (ONGC) and Oil India as well as central government whose earnings from royalty and income tax will dip by about Rs 800 crore during the remainder of the fiscal, according to industry estimates. The ratings agency says Oil India and ONGC may face a revenue decline of Rs 120-130 crore and Rs 1080-1150 crore, respectively, on gas sales during the second half of FY16. In the mid-stream segment, Gail (India) may see Rs 1790-1900 crore lower trading revenue from the sale of domestic gases during 2HFY16.
But for corporates such as Zuari Agro and Rashtriya Chemicals and Fertilizers (RCF), the reduction in prices comes as a boon as it will result in reduction of input prices. RG Rajan, Chairman and Managing Director of state-owned Rashtriya Chemicals and Fertilizers, told CNBC-TV18 that the reduction in gas prices will help the company save roughly Rs 70 crore every month on gas costs.
Kapil Mehan, MD & Group CEO, Zuari Agro too says the price cut will help reduce input costs by roughly Rs 1000 per tonne.
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