New gas price will discourage exploration: S&P

The steep downside revision in the price of domestic natural gas by the government at $3.82 per unit for six months from October 1 is set to influence the business decisions of oil exploration and production companies, American ratings services Standard & Poor's said on Sunday.

New Delhi: The revised price of domestic natural gas at $3.82 per unit for six months from October 1 will "discourage oil exploration and production companies from committing new capital expenditure", American ratings services Standard & Poor's said on Sunday.

"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," S&P said in a statement.

"However falling, hydrocarbon prices over the past one year have brought in uncertainty over the viability of exploration projects," it said.

The ratings agency said India should benchmark its natural gas prices to similar gas-deficient nations instead of using rates prevalent in gas-surplus areas like the US and Canada.

"The formula for pricing domestic gas considers prices in gas-surplus geographies such as the US and Canada, which have developed gas transportation infrastructure," the statement said.

"Given India's gas production deficit and emerging gas transport infrastructure, comparing prices in similar geographies will be more relevant," it added.

Domestic gas prices are calculated by taking the weighted average prices at the Henry Hub of the US, the National Balancing Point of Britain and the rates in Alberta of Canada and Russia with a lag of one quarter.

Noting gas prices in India are lower than in other regional economies, S&P said this was likely to discourage capital expenditure in exploration.

"Globally, several E&P companies have scaled back spending and put new exploration projects on hold amid low hydrocarbon prices," S&P said.

"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.

This reduction will impact producers like state-run Oil and Natural Gas Corp, which stands to lose Rs.1,059 crore from profits, ONGC director (Finance) A.K. Srinivasan told reporters here.

The new price is a sharp 18 percent cut over the current $4.66 per million British thermal unit (mBtu) on gross calorific value (GCV) basis.

On net calorific value (NCV) basis, the new gas price for October 1 to March 31, 2016 would be $4.24 per mBtu as compared to $5.18 currently.

India Ratings and Research (Ind-Ra) said domestic gas producers state-run Oil India and ONGC could face a revenue decline of Rs.120-130 crore and Rs.1,080-1,150 crore respectively on gas sales during the second half of 2015-16 fiscal.

ICRA said the cut "reduces the profitability of the gas produced from the existing fields and adversely impacts the viability of new exploration and development projects".