The government’s decision to cap domestic natural gas prices from conventional fields to a range of US$4-6.5 per million British thermal units (MMBtu) will help city gas distributors with margins, incentivize gas usage and increase productivity of upstream producers. The volatility of cash flows will be less. Fitch Ratings said this on Wednesday.
“We expect a partial pass-through of the lower Administered Price Mechanism (APM) gas prices at which domestic upstream producers sell compressed natural gas (CNG) and domestic piped natural gas (PNG) prices to city gas distributors. supply. to add to the margins of distributors in the near term,” it said in a statement.
City gas retailers such as Indraprastha Gas Ltd and Adani Total Gas Ltd announced a cut in CNG and PNG prices by Rs 6-8 over the last weekend, reflecting the cut in input gas prices.
The APM price under the new regime was calculated at US$7.92 but has been capped at US$6.5 for the rest of April, down 24 per cent from the October 2022-March 2023 level.
“We expect such reductions in prices by city gas distributors and setting price caps to add certainty to the price advantage of domestic natural gas relative to alternative fuels, support gas use for transport and homes, and moderate the cost of natural gas,” Fitch said. We expect overall demand to pick up over the period.” Said.
The revised mechanism is in line with India’s goal of increasing the share of natural gas in its energy mix.
“We expect price to moderate volatility in cash flows from gas production for Oil India Limited (OIL) and Oil and Natural Gas Corporation Limited (ONGC). The floor is higher than APM prices from 2015 to 2021, While the ceiling is lower than the current market prices,” it said.
Gas sales accounted for 9-11 per cent of OIL and ONGC’s standalone revenue in the financial year ending March 2022 (FY22), and legacy fields accounted for the majority of their gas production.
Fitch said the financial buffers created by OIL and ONGC over the last 18 months, when industry conditions were favourable, would help them absorb near-term shortfall in APM prices. Economy with domestic gas to account for 55 per cent of India’s gas consumption in the first nine months of FY 2022-23.
Last week, the government amended the APM formula for old fields allotted to ONGC and OIL on nomination basis. The prices for the next month shall be 10 per cent of the imported Indian crude basket, representing the average between the 26th day of the previous month and the 25th day of the current month, and shall be announced on the last day of the current month, subject to a ceiling . and the roof.
The changes were made after the Kirit Parikh Committee’s recommendations were submitted in November 2022, when domestic gas prices were at a record high under the previous mechanism.
The pricing formula for deep water, high pressure, high temperature fields is unchanged and is set at US$12.12 per mmBtu for April-September 2023 (US$12.46 per mmBtu for October 2022-March 2023), Fitch said. Said maintains incentives for upstream producers. Like ONGC and Reliance Industries Ltd will continue to develop such areas.
The prices of gas produced from new wells or well interventions in old fields, subject to floor and ceiling prices, are allowed a 20 per cent premium over APM prices, and this gas will be allocated to customers for five years.
APM prices will also apply to New Exploration Licensing Policy (NELP) or production-sharing contracts for pre-NELP blocks where prices require government approval, but the floor and ceiling will not apply.
“The revised mechanism will retain the price cap in FY24 and FY25, and allow an annual increase of USD 0.25 in the price cap thereafter,” Fitch said. “It does not include any clear timeline for the liberalization of prices.”
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