India can't peg gas prices to US, Canada norms: S&P
03 October 2015
India should benchmark its natural gas prices to similar gas-deficient nations instead of using rates prevalent in gas-surplus countries like the US and Canada, according to Standard & Poor's Ratings Services.
Using rates in gas-surplus nations, domestic natural gas prices earlier this week were cut by 18 per cent to $4.24 per million British thermal unit, a rate which S&P said will discourage oil exploration and production (E&P) companies from committing new capital expenditure.
"The formula for pricing domestic gas considers prices in gas-surplus geographies such as the US and Canada, which have developed gas transportation infrastructure. Given India's gas production deficit and emerging gas transport infrastructure, comparing prices in similar geographies will be more relevant, in our opinion," it said in statement.
Gas prices in India, S&P said, are lower than in its regional peers as well. Natural gas prices in Thailand and Indonesia average $8-10 per mmBtu.
"We believe the government's plan to stimulate private sector participation and bring in transparency in gas pricing by introducing formula-driven gas pricing is well intended. However falling hydrocarbon prices over the past one year have brought in uncertainty over the viability of exploration projects," it said.
The gas price reduction, it said, is likely to discourage capex in exploration and development of gas reserves in India, where most large finds are in deep water zones.
"Globally, several E&P companies have scaled back spending and put new exploration projects on hold amid low hydrocarbon prices," it said.
Low gas prices could materially reduce profitability of state-owned ONGC's planned Rs40,000 crore investment in developing its KG-basin gas discoveries.
"Investment by private sector oil and gas companies in India has been small and their capex commitments are likely to be uncertain because of the price revision," it added.
ICRA said the gas price reduction has significant implications for different sectors since the cut brings the rate to almost the level it was prior to implementation of the modified Rangarajan formula thereby negating all gains post implementation of the aforementioned formula.
The cut "reduces the profitability of the gas produced from the existing fields and adversely impacts the viability of new exploration and development projects", it said.
"With most of the conventional and unconventional resources in the country being present in the more challenging and higher cost offshore areas, the effective rollback of prices to earlier levels will challenge the incumbents' ability to justify the viability of exploration and development projects for increasing production levels," it said.
With domestic gas price trending down, response to the forthcoming auction of exploration blocks could get "impacted with companies factoring in gas prices that could fall to 2010 levels ($4.2 per mmBtu) even as there has been run up in costs of manpower, oil fields services, contractors etc.," ICRA said.
To incentivise exploration and production from tough geologies and encourage participation in the future New Exploration Licensing Policy (NELP) rounds the government would need to provide clarity on the price premium to be paid for difficult fields, it added.
Separately, India Ratings and Research (Ind-Ra) said the benefit from reduced gas price will be partly offset by the near 6 per cent rupee depreciation.
While the gas price has been cut by 18 per cent, "the net impact of the reduced domestic gas prices in rupee terms would be nearly 11-16 per cent", it said in a statement.