ONGC, Oil India slip as Oil Ministry proposes higher gas price on extra output only

NEW DELHI: PSU gas producers such as ONGC, Oil India took a beating in trade on Thursday after media reports suggested that the petroleum ministry has proposed that higher gas price as per the Rangarajan formula could be allowed only for incremental production over and above the current levels.

This is an alternative to applying the formula unconditionally from July 1. Restricting the higher price to additional output, the ministry feels, would incentivise production while also protecting the interests of consuming industries like power and fertilisers, said media report.

Reacting to the news ONGC which has already rallied over 50 per cent so far in the year 2014 plunged as much as 8 per cent to Rs 408.65 and ended the trade Rs 420.45 down 5.13 per cent.

" Reliance Industries will be major beneficiary of the recent policy, as they would be in position to hike production. While for ONGC & OIL incremental production wouldn’t be so high in next 2 years atleast," said A K Prabhakar, Independent Market Expert.

"ONGC & OIL would benefit in long-term when unviable wells become operational and new NELP norms. More important for oil companies is government subsidy policy as high hopes are already built in," he added.

Other stock in the oil & gas sector such as BPCL, HPCL, IOC, Cairn India, Reliance Industries and GAIL also ended the day in red.
"Just to understand, those companies which have bulk of the production at present going on and they are expecting small incremental production would see some sentimental negative impact," said Piyush Jain, research Analyst at Morningstar in an interview with ET Now.

According to media reports, the new move could be a dampener for ONGC, which produces 60 million metric standard cubic metres per day (mmscmd) of gas and the same applies to Oil India and other PSU gas producer.

There are little chances that the PSU would dramatically increase its production, added the report.

ONGC & Oil India are front runners to benefit from increase in gas price hike. However, incremental price hike could just be a sentiment negative given the fact that production in some of the discovered block is yet to start.

"ONGC discovered gas in the KG basin around almost the same time as Reliance Industries, but the production is yet to start there," said Prayesh Jain, Research Analyst, IIFL India in an interview with ET Now earlier in this month.

"So getting clearances has been a big issue with respect to the E&P side and that is where the reforms are expected and the biggest beneficiaries of that would be Reliance Industries, ONGC, Oil India and, to some extent, a company like Cairn India," he added.

However, if the ONGC does get new gas price for incremental production it should help them in tapping new discoveries which would result in higher production.

"There are lot of discoveries where ONGC is not able to tap at present, because of the lower gas price so we should wait and if the incremental gas production is going to fetch them higher gas price, there is lot of production which would come into live which would not be that big negative," added Jain.

Jain is of the view that in future a part impact will be from the gas prices and a part impact will come from a subsidy regime. So a large producer like ONGC is actually running up because market is also expecting a fair subsidy regime.