New Pricing Norms Cut Earnings Downside for Gas Producer

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Credit: Korea Shipbuilding & Offshore Engineering

India’s new gas pricing regime will offer greater downside protection for earnings of gas companies such as Oil and Natural Gas Corp (ONGC) and Oil India Ltd, reports the Energy World quoting S&P Ratings.

The new norms will not affect the pricing for gas produced from difficult fields that companies like Reliance Industries Ltd operate.

Fluid market price revisions

Under the new guidelines announced on April 6, 2023, the government will set prices for domestically produced gas on a monthly basis; the rate will be 10 per cent of the average price of the Indian crude basket in the preceding month. The price will have a floor of USD 4 per million British thermal unit (mmbtu) and a ceiling of USD 6.5 per mmBtu.

We expect the new gas pricing terms to result in more fluid market price revisions,” said S&P Global Ratings credit analyst Shruti Zatakia. Under the earlier regime, prices were reset semi-annually and were linked to gas prices in key international trading hubs.

The pricing mechanism for gas production from deep water, ultra-deep water, high-temperature, and high-pressure fields is unchanged. This means companies such as ONGC and RIL that operate such fields will maintain marketing and pricing freedom, subject to a ceiling price that is revised semi-annually.

The floor price means ONGC will be able to generate a minimum of USD 4 per mmBtu on its gas production even if international natural gas prices decline to historical lows. The company’s realizations averaged USD 2 per mmBtu-USD 3 per mmBtu during low hydrocarbon prices in 2020,” S&P said in a statement.

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Source: The Energy World