Moody's joins S&P in calling for gas price hike

Global ratings agency Moody's has said the sharp cut in natural gas prices notified by the Indian government will not only impact state-run Oil and Natural as Corp (ONGC) the most, but will also discourage new exploration investments and fuel imports.

''The gas price reduction is credit-negative for upstream producers ONGC and Oil India Ltd because it will lower their revenues and cash flows, which are already declining from low oil prices,'' an article by Moody's Credit Outlook said today.

This follows a similar assessment by Standard & Poor's, which said last week that import-dependent India should not follow the pricing cues of oil surplus nations like the US and Canada. (See: India can't peg gas prices to US, Canada norms: S&P).

''The gas price reduction will have its greatest effect, in absolute terms on ONGC, the country's largest producer of natural gas,'' Moody's said, adding that it expected ONGC's revenues to decline by around $300 million and for Oil India Ltd by only around $33 million.

Natural gas prices in India are set by taking a volume-weighted annual average of those prevailing in the US, Britain, Canada and Russia. Prices are calculated on the trailing 12 month data with a lag of one quarter.

''India relies on natural gas imports to meet its energy needs. Imports accounted for 36 per cent of the total natural gas consumption in India for fiscal 2015 and 39 per cent for the five months between 1 April and 30 August 2015,'' Moody's said.

''Imports will continue to increase as low international gas prices stimulate demand for natural gas and low domestic prices discourage further investments by upstream players to explore and develop new gas reserves,'' it said.

''When oil prices are low, upstream players cannot economically produce from difficult terrains such as deep water, where costs are substantially higher,'' Moody's added.

Standard & Poor's said the government's plan to stimulate private sector participation and bring transparency in gas pricing with formula-driven pricing was well intended. But falling oil prices over the past one year has brought uncertainty over the viability of exploration projects.

 ''The formula for pricing domestic gas considers prices in gas-surplus geographies such as the US and Canada, which have developed gas transportation infrastructure,'' S&P said, adding this was not a proper mechanism given India's gas production deficit and weak gas transport infrastructure.

The two agencies held a similar view that fresh commitments by private oil and gas companies will remain uncertain, given that several exploration firms globally have scaled back their spending and put new projects on hold amid low hydrocarbon prices.