Natural gas prices to fall next fiscal: Goldman Sachs

New Delhi: Natural gas prices for existing fields like KG-D6 of Reliance Industries will dip to USD 3.6 per unit in next fiscal from USD 3.82 currently, Goldman Sachs said Wednesday.

"We believe Indian domestic natural gas prices that are linked to prices in gas surplus economies remain materially below the costs to develop marginal and deep-water fields and hence do not incentivize exploration and production capex," it said in a report.

This has resulted in Indian producers potentially losing USD 2 billion annually in value added assuming they can replace imports entirely, it said.

"We believe the current gas price regime is not incentivizing domestic capex sufficiently as we expect prices under the current formula to decline to USD 3.6 per million British thermal unit in FY17 while cost for new deep-water discoveries ranges between USD 6 to USD 7 per MMBtu," Goldman said.

The Oil Ministry earlier this week floated a consultation paper for freeing prices of natural gas produced from fields auctioned in future. The rates for existing and old fields will remain to be priced at the current formula which uses average price prevailing in gas-surplus economies.

"We note 47 trillion cubic feet of domestic natural gas resources remain untapped and believe linking the gas price to liquid/alternative fuels and letting producers take the commodity risk could create a market conducive to private capex," Goldman said.

The nomination blocks of ONGC and Oil India with cost ranging from USD 3.2 to USD 3.6 per mmBtu would fail to make economic returns at the new rates.

"We note 47 tcf of gas reserves remain untapped and believe linking gas price to liquid/alternative fuel and letting producer take the commodity risk could create a market signaling mechanism for private capex reducing dependency on imports," it said.

The BJP-led government had in October last year approved a new pricing formula for all domestically produced natural gas.

As a result, rates rose by about 33 percent to USD 5.61 per million British thermal unit for a period up to March 31 from the long-standing price of USD 4.2. The rates, on net calorific value (NCV) basis, dropped to USD 5.05 per mmBtu for six month period beginning April 1, 2015. From October 1 rates fell to USD 4.24.

This rate, it said, is lower than USD 9 per mmBtu gas price in China, USD 10.5 of Philippines, USD 6.5 of Indonesia and USD 8 per mmBtu price prevalent in Thailand and Malaysia.