The new gas pricing policy for deep-water fields is a move in the right direction to boost domestic production. However, given the prevailing low prices of oil and gas globally and a veiled cap on gas prices as per the new formula, it is likely to limit investment from explorers in the medium term. This is the key reason why stocks such as Oil & Natural Gas Corp, Oil IndiaBSE -0.21 % and Reliance IndustriesBSE 0.23% were muted after the announcement.
The government announced the formula to price the gas from discoveries in difficult terrains.
According to the new policy, the gas price of a challenging gas field will be the lowest of these three - imported fuel oil price; weighted average of coal, fuel oil and naphtha; and the price of imported liquefied natural gas. However, the pricing formula for the producing fields remains unchanged. According to CLSA, the price of gas in a challenging area would have been in the range of $4.2-13.8 per mmbtu since January 2014, which implies gas prices have hovered around 11-14% of the brent oil prices.
Analysts believe the government's intent is positive to kick-start new investment in gas fields, but there are certain factors that will pose challenges. The main factor is that the government has sought to restrain marketing freedom by putting a cap on the gas price. In addition, 30% weight to imported coal prices is an attempt to minimise the floor of the gas price.
Coal competes with gas only for power generation. The former is used for base load generation, while the latter is for peak power demand-supply due to a significant pricing difference between the two fuels and the ease of starting and shutting off a gas power plant. So, the logic of inclusion of coal to determine gas pricing is debatable. Besides, India is a net exporter of fuel oil and naphtha, and gas pricing linked to the import parity prices of these two products does not seem very logical.
The policy will not apply to any gas field where there is pending arbitration or litigation filed by the contractors directly about gas pricing.
Some analysts believe that Reliance may benefit if it withdraws the price-related arbitration, while continuing with arbitration on cost recovery.
ONGC, based on the new gas pricing formula, may expedite planned development of 1.8 TCF reserves in KG98/2 block, which is enough to produce as much as 10 mmscm of gas per day.