India Inc calls for revising gas pricing formula

After Moody's and Standard & Poor's, now the Indian industry has said that the new gas price formula of governrment is not conducive for exploration and production activity in the country

New Delhi: Indian industry has called for the government to revise the formula for setting domestic natural gas prices to adequately remunerate exploration and production activity in the country, the Federation of Indian Chambers of Commerce and Industry (FICCI) said on Friday.

In October 2014, the government announced an upward revision of the price for gas to $5.61 per unit against the industry's demand for at least doubling it to a little over $8 per unit, as per the Rangarajan Committee recommendations.

"FICCI strongly advocates a gas pricing mechanism which adequately remunerates domestic exploration and production) (E&P) activity. Not only is this imperative for the development of domestic hydrocarbon industry, but is vital towards ensuring India's energy security," the industry chamber said in a statement here.

"A pricing regime should be reflective of the enormous geological risks and production uncertainties which are inherent in geography such as India," it said.

In a letter written earlier this week to Petroleum Secretary Kapil Dev Tripathi, FICCI said the gas price formula benchmarked on prices prevailing in "gas
surplus/exporting geographies" like Russia Canada and the US, "will only make the Indian market less attractive in a world where other markets are more remunerative."

"Government should revise the formulae based on prices of gas importing/gas deficit countries, that is sustainable in the long run," FICCI Secretary General A. Didar Singh wrote.

"Continuing with the current gas pricing regime will severely affect India's larger goal of reducing oil import dependency and building the domestic hydrocarbon capacity," he said.

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.

American ratings services Standard & Poor's said earlier this month that 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".

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.

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

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

Another global ratings agency Moody's said on Monday: "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."

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

"The government needs to immediately implement its decision to announce higher premium for deepwater, ultra-deep water as well as high-temperature and high-pressure fields," Didar Singh said.

While approving a new gas pricing formula in October last year, the government had decided that new gas discoveries in deep-water, ultra-deep sea as well as high-temperature and high-pressure areas will be given a premium over and above the approved price.

While shallow-water blocks are at a depth of up to 100-500 metres, deep-water blocks descend to around 1,000 metres. Those at depths beyond 1,500 metres are classified as ultra-deep-water blocks.

These are the areas where the Reliance Industries-led consortium has maximum discoveries on the eastern offshore.