New Delhi: Natural gas production remains a loss-making proposition for most fields for the Indian upstream producers as government-dictated gas price remains at its lowest level, rating agency Icra has said.
The domestic gas price notified at USD 1.79 per million British thermal unit for the six months beginning April 1 remains the lowest since the institution of the modified Rangarajan formula. Additionally, the ceiling on price for gas produced from deep water, ultra deepwater, high temperature and high-pressure fields has also been announced at USD 3.62 per mmBtu for April-September 2021-22 which is 10.8 per cent lower than the price ceiling of USD 4.06 for October-March 2020-21 which would dampen the development of such projects.
"While this is unfavourable for domestic producers, it will benefit gas consumers. The consumers will also benefit in the long run from the expectations of continued supply overhang," Icra said commenting on the gas price notified by the government earlier this week.
As per an Icra note, at such low gas prices, gas production remains a loss-making proposition for most fields for the Indian upstream producers notwithstanding some decline in oil field services/equipment costs.
However, the depreciation of Indian Rupee against US dollar, would aid the realisations of the gas producers but only to an extent.
Sabyasachi Majumdar, Senior Vice-President & Group Head, Corporate Sector Ratings, Icra, said, "Going forward, the supply glut is expected to keep prices of domestic gas low in the near to medium term leading to poor returns even as domestic gas producers such as ONGC and Reliance Industries Ltd (RIL)-BP ramp up gas production significantly."
The absence of a floor and sustained low prices as has been seen in the past few years post implementation of the modified Rangarajan formula make exploration and production unviable even for benign geologies, Icra noted.
"Accordingly, low natural gas prices remain negative for the upstream sector adversely impacting revenues, profitability and cash accruals and the incumbents have petitioned the Government of India to provide a floor price for gas prices."
Spot LNG prices had breached USD 30 per mmBtu in February 2021 due to increase in oil prices, unplanned outages at export facilities in several countries, multiple cold waves, high shipping rates and delays in the Panama canal.
Though spot prices have come down to USD 6-6.5 per mmBtu levels, low inventory levels as winter ends are set to support prices, as well as demand, as North Asia and Europe look to refill gas storage.
Nevertheless, the supply overhang remains with about 37.6 million tonnes per annum liquefaction capacity added in 2019 and 27.8 MTPA in 2020, besides which capacity additions till 2025 would be in excess of incremental demand which will weigh on gas prices, Icra said.
From the consumers' perspective, the low domestic gas price is a positive.
"The continuation of the low domestic gas prices would lead to a competitive cost of generation for the domestic gas-based power generation projects," it said. Given the cost-plus nature of the power purchase agreements tied up by the gas-based power projects, the benefit is expected to be passed on to the customers, mainly the state distribution utilities (discoms).
However, the extent of the benefit would be limited for the discoms, given the subdued utilisation of the gas-based power plants in the country with annual average plant load factor (PLF) of 22-25 per cent for the gas-based capacity at all-India level, amid the inadequate supply of domestic natural gas.