Industry divided on impact of gas price reduction

The government on Friday cut gas prices to USD 2.5 mmbtu from USD 3.06 mmbtu from October 1 to March 31, 2017. The industry, however, was divided on the benefits accruing from the price reduction.

Former ONGC Chairman and Managing Director RS Sharma told CNBC-TV18 that incremental production can’t be seen unless gas prices are hikes increased. Sharma added that he doesn’t see a lot of investments coming in oil and gas sector due to low prices.

Sharma was also critical of the government’s gas pricing policy saying he fails to understand it.

IIFL’s Sanjiv Bhasin, on the other hand, lauded the price reduction. He said the cut in gas price is a welcome step and a win-win situation for users. However, he doesn't expect the entire price cut to be passed on to consumers.Below is the transcript of Sanjiv Bhasin and RS Sharma's interview to CNBC-TV18's Nithya Balakrishnan.Q: This USD 2.5 per unit  pretty much inline with market expectations. So, what really will it have  in terms of impact on upstream companies?Bhasin: It is a welcome step and it is inline with what the global trend of gas price is. In upstream companies I think Reliance  and Cairn will be marginally  affected because they have priced that in. However ONGC and Oil India will have to bear the brunt of lower gas prices. So, it will affect them on their profitability which maybe offset marginally by the premium pricing which you indicated. However it is a win-win situation for the users like you had indicated, power, fertiliser, energy and even the distribution companies Gail, IGL and Mahanagar Gas because the entire benefit may not be passed on to consumers and the margins for them may expand.Q: What do you think really should have been the government's move because ONGC has been repeatedly asking for that minimum floor price? Given that they have gone ahead and reduced gas prices by 20 percent, do you think that they should have stuck with the minimum floor price which kind of insured upstream companies against any volatility? Should that have been a support move by the government?Sharma: I can only say that I only feel  disgusted at the government policy for this gas pricing. On one hand we say that we want to be gas based economy, we want to promote more and more use of gas but where is the gas? At USD 2.5 who is going to come and invest in this area? Currently we are importing 35 percent of gas consumption in the country and we are happily paying USD 5-5.5 mmbtu for the LNG that gets imported. So, this is a strange dichotomy that we are spending precious foreign exchange and supporting economies of other countries for import of gas.In our own backyard we have discovery but we don't want to pay more than USD 2.5. I fail to understand these policies. I have been saying this for quite some time that with this pricing regime no new investments will come. ONGC, Oil India because they are already producing even at a loss, they will continue producing. However where is the new investment coming? I am afraid there is no gas, they will all be using most of it as imported gas at higher prices but we only want to penalise the domestic producers. I feel more logically, that sort of mechanism.Q: We are talking about a reflection in global trend, we were talking about crude price globally being depressed and international gas prices also being down and which is the result the domestic  prices have come down. Keeping that in mind, if the government goes ahead and decides to put ONGC as the next target for divestment, offload 5 percent stake, do you think this kind of range bound gas prices domestically will actually hamper the kind of investor sentiment that you are looking for such a stake sale?Sharma: You said international prices, I am also talking of international pricing. When you import LNG, I am talking in the spot LNG prices - even at the lowest the imports were at USD 4.5 now they are at about USD 5 mmbtu, which international price you are talking about? You are talking about shale gas production in US where the gas is in surplus. You are talking of the gas production in the countries who have abundant of gas and there is no buyers there but the same gas when gets concerted into LNG, gets imported into into economies like ours the delivered price here is more than USD 5. So, we don't want to pay that price to the domestic producers, we don't want to support our Indian industry, we don't want to support employment here. So, how this country will become gas based economy? There is no gas available at that sort of prices, I am afraid no incremental gas will come except existing production coming from ONGC and Oil India.