ONGC cheers move to hike gas price, private players unhappy

NEW DELHI: The Modi government's decision to raise natural gas prices to $5.6 per unit from $4.2 will significantly boost the earnings of ONGC, but private explorers who were pitching for higher rates and waiting for signals of eventual decontrol are disappointed.

Some officials of exploration companies, particularly in the private sector were disappointed and expressed concern that the price was not good enough to attract more investment. But ONGC Chairman DK Sarraf welcomed the decision and said every $1 increase in price would add Rs 4,000 crore in its annual top line and Rs 2,350 crore on the bottom line.
"The government's decisions to have a non-controversial gas pricing mechanism will encourage both the company and the industry to undertake exploration and development works," Sarraf told ET. The new gas price will not be applicable to Reliance Industries' KG-D6 production, as expected, because the company is in arbitration with the government.

RIL will get the old price unless it makes up for the shortfall in gas production, for which the oil ministry blames the company, while Reliance attributes the decline to geological reasons. But consumers will pay the new price.

"It is proposed that the difference between the revised price and the present price ($4.2 per mmBtu) would be credited to the gas pool account maintained by Gail India, and whether the amount so collected is payable or not to the contractors of this block would be dependent on the outcome of the award of pending arbitration and any attendant legal proceedings," the government said in a statement on Saturday evening.

For gas consumers, the decision is a breather because the increase is 75 per cent less than what was expected from the Rangarajan formula which the UPA regime had approved but could not implement. But consumers such as power plants are more concerned about the supply of natural gas, which has been falling, leaving many of their plants idle or sub-optimal.

"Natural gas supply is a bigger concern than pricing. State utilities are buying power produced from expensive imported natural gas to meet the demand in peak hours. It would be important to see if this revised price results in higher natural gas flow," said an executive with a Gujarat-based power project.

He added that power produced from natural gas at revised price will remain in the range of Rs 3 to RS 4 per unit and will continue to remain affordable for power utilities. Ashok Khurana, director general of Association of Power Producers, said the decision augured well for the power sector.

"Decision on natural gas price revision is a good development for the power sector since it eliminates uncertainty for the developers while exploration companies will also get higher returns on their investments," he told ET.

"It is far below than $8.4 proposed by the Rangarajan panel. Many discoveries will not be viable at this rate," an executive working for a private explorer said requesting anonymity. Association of Oil & Gas Operators (AOGO), whose members include global and domestic energy majors such as BG, BP, Eni, Cairn India, Reliance Industries and ONGC, expressed disappointment at the decision.

Sarraf said the gas pricing policy has taken care of deepwater discoveries which might not be economically viable at $5.61 per unit. The government has promised higher rates for future discoveries in deepwater regions.

"For all discoveries after this decision, in Ultra Deep Water Areas, Deep Water Areas and High Pressure-High Temperature areas, a premium would be given on the gas price to be determined as per the prescribed procedure," the government said in its statement on gas pricing. Industry is concerned that there is no clarity on the extent of premium, its basis of calculation, and the fact that this reinforces state control on natural gas prices.

Exploration firms say that gas should have the same pricing freedom as oil, which is sold at international rates from local oilfields. The government also expanded incentives for oil and gas firms in the northeast.