Govt cuts gas price by 25% to lowest on record

Natural gas price in India touched the lowest rate on record after the government on Wednesday slashed the price by 25 per cent to USD 1.79, denting revenues of producers like ONGC

This is the third straight reduction in rate in one year. The price was cut by a steep 26 per cent to USD 2.39 in April. Source: Reuters

Natural gas price in India touched the lowest rate on record after the government on Wednesday slashed the price by 25 per cent to USD 1.79, denting revenues of producers like ONGC.

The price of gas, which is used to generate electricity, make fertiliser and CNG for automobiles, has been cut to USD 1.79 per million British thermal unit for six months beginning October 1 from the current USD 2.39, an order of the Oil Ministry's Petroleum Planning and Analysis Cell (PPAC) said.

This is the third straight reduction in rate in one year. The price was cut by a steep 26 per cent to USD 2.39 in April.

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The rate paid to producers of new gas from difficult fields such as deepsea has also been cut to USD 4.06 per mmBtu from USD 5.61.

Natural gas price is set every six months on April 1 and October 1- each year based on rates prevalent in surplus nations such as the US, Canada and Russia.

The rate from October 1 is equivalent to the price paid to Oil and Natural Gas Corp (ONGC) and Oil India Ltd (OIL) prior to May 2020 when a formula based pricing was first introduced.

While the cut in prices would mean widening of losses for India's top oil and gas producer ONGC, it may also lead to lower cost of production of electricity and CNG as well as lower piped natural gas prices.

ONGC, sources said, had posted Rs 4,272 crore loss on gas business in 2017-18, which is likely to widen to over Rs 6,000 crore in the current fiscal (April 2020 to March 2021), they said.

ONGC has seen incurring losses on the 65 million standard cubic meters per day of gas it produces from domestic fields shortly after the government in November 2014 introduced a new gas pricing formula that had "inherent limitations" as it was based on pricing hubs of gas surplus countries such as the US, Canada, and Russia.

Sources said ONGC in a recent communique to the government has stated that the break-even price to produce gas from new discoveries was in the range of USD 5-9 per mmBtu.

In previous years, loss from the gas segment was getting offset from the gain from the oil business. But with oil business itself coming under severe strain due to a sharp slump in benchmark prices, it has become difficult for the company to meet even the operating expenses, they said.

In May 2010, the government had raised the rate of gas sold to power and fertilizer firms from USD 1.79 per mmBtu to USD 4.20. ONGC and OIL got USD 3.818 per mmBtu price for the gas they produced from fields given to them on nomination basis and after adding a 10 per cent royalty, the fuel cost USD 4.20 per mmBtu for consumers.

The Congress-led UPA had approved a new pricing formula for implementation in 2014 that would have raised the rates but the BJP-led government scrapped it and brought a new formula.

The new formula takes into account the volume-weighted annual average of the prices prevailing in Henry Hub (US), National Balancing Point (the UK), Alberta (Canada), and Russia with a lag of one-quarter. Prices are set every six months on April 1 and October 1 each year.

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The rate at the first revision, using the new formula, came to USD 5.05 but in the subsequent six-monthly reviews kept falling till it touched USD 2.48 for April 2017 to September 2017 period. Subsequently, it rose to USD 3.69 in April 2019-September 2019 before being cut by 12.5 per cent in October 2019 to USD 3.23.

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