Govt cuts natural gas prices by 16% to $4.24 per mmBtu

Speaking to CNBC-TV18, Ex-ONGC head, RS Sharma said the development is a big negative and the government will have to work to revive formulation in order to promote the exploration and production (E&P) sector.

Below is the transcript of Jal Irani's interview with Reema Tendulkar and Varinder Bansal on CNBC-TV18.

Reema: Your initial reactions and the stock impact, we have already seen Indraprastha Gas (IGL), Gujarat Gas perk up while Oil and Natural Gas Corporation (ONGC) is a bit subdued. Is there more of a reaction to play out?

A: No, the impact is fairly straightforward. Essentially the producers of gas with the 18 percent cut would obviously get hurt and the consumers of gas, primarily the city gas companies, will benefit. So, how does the producers get hurt and who are the big producers? Essentially ONGC is obviously the largest with about 40 percent of upstream production coming from gas about 23 percent of turnover. So, essentially, we estimate that it would be an impact of five percent on earnings because of this cut in the second half.

In the case of city gas, IGL, roughly about 80 percent of its gas sourcing is this domestic gas. So, IGL's profits should increase by five percent if it does not pass on the benefit to the consumer. However, my thought is that it will pass on the benefit to the consumer to enhance volumes instead because gas competes with diesel and as diesel prices have come down, what they would like to do essentially is increase volumes rather than simply just margins straightaway.

Varinder: I do not know whether you have studied Gujarat Gas or not. So, have you any implications on what happens to Gujarat Gas apart from IGL?

A: So, while we do not have Gujarat Gas under formal coverage, we do have a look at it and Gujarat Gas will also be a beneficiary, but unlike IGL where 80 percent of its turnover comes from city gas, which is the input which is domestically produced gas in the case of Gujarat Gas, it is the other way around -- only 20-25 percent or a much smaller component is the city gas business which is supplied by the domestic gas price which has been cut. So, it would be a much smaller beneficiary.

Varinder: What happens to GAIL?

A: GAIL would again benefit, but then marginally again, because our understanding is that in the case of the liquefied petroleum gas (LPG) the input cost is still pegged to domestic gas, so to that extent, their cost should reduce. But then in the context of the size of the company the other significant businesses that they do, essentially petro-chemicals being very large one where they have just doubled the capacity and of course pipeline and international gas imports etc this is again a relatively smaller component. So, GAIL would also benefit, but again in a smaller way.

Varinder: I was reading your note where you mentioned that domestic gas prices could be cut to USD 4.2 per million British Thermal Units (mmbtu). What we are getting a news is that it could be cut to nearly USD 3.82.

A: No, there is a gross calorific value and then there is a net calorific value. This USD 4.24 is exactly what was as per expectations. So, the USD 4.24 is not net calorific value which compares to USD 4.2 which was expected in the press earlier itself.

Reema: If we are not mistaken, we thought the gas production is already at a four year low at least as of last year. With lower gas prices, is it going to hurt even more and what would your estimates be of gas production going forward and how will it impact?

A: Needless to say, it disincentivises domestic gas production as RS Sharma pointed out five minutes back. At USD 4.2 our economics of producing gas domestically is marginal at best, especially because incrementally a bulk of your domestic resources are in deep waters and tougher terrains. So, even if you look at the Deen Dayal block for Gujarat State Petroleum Corporation (GSPC), the parent of Gujarat State Petronet Ltd (GSPL), while that is shallow waters, it is also very high pressure, very hot gas. So, that also makes it rather expensive.

Similarly, if you look at ONGC's upcoming deep water Krishna Godavari (KG), the company will be in a better position to say where the viability sits, but it is probably more in the region of USD 6-8 per mmbtu, despite actually deep water rig rates halving to about USD 300,000 a day. Despite that, it is fairly expensive gas. I understand in fact from what ONGC has been saying in the past. Even Mumbai High, which is one of the most prolific fields in the world and in fact half of the country's production, I understand even for Mumbai High, the breakeven is not much lower than USD 4.2. I think it is USD 3.8 or even upwards of that.

So, domestic production, incrementally -- other than what has been committed by the 12 odd ONGC's marginal fields going into production -- it is difficult for anybody to commit any serious capital to upstream exploration in the country.