Gas price cut to discourage new investment in oil sector: S&P

New Delhi: Standard & Poor’s Ratings Services today said the government’s decision to cut natural gas prices by 18 percent will discourage oil exploration and production (E&P) companies from committing new capital expenditure.

It will also add economic uncertainty to their ongoing investments, it said.

However, the impact on the cash flows of Oil and Natural Gas Corp (ONGC) and Reliance Industries will be minimal.

“The ratings on the companies are therefore not affected,” it said.

Stating that the formula prices domestic gas on the basis of rates in gas-surplus geographies such as the US and Canada which have developed gas transportation infrastructure, S&P said comparing prices in similar geographies as India would have been more relevant.

“Given India’s gas production deficit and emerging gas transport infrastructure, comparing prices in similar geographies will be more relevant,” it said adding gas prices in India are lower than in its regional peers as well.

Natural gas prices in Thailand and Indonesia average $8-10 per mmBtu.

According to the government’s formula-driven gas pricing, the price for domestically produced natural gas on a net calorific value basis is set at $4.24 per million British thermal unit (mmBtu) for the six months starting 1 October 2015, down from USD 5.18 a unit earlier.

“We believe the government’s plan to stimulate private sector participation and bring in transparency in gas pricing by introducing formula-driven gas pricing is well intended.

“However falling hydrocarbon prices over the past one year have brought in uncertainty over the viability of exploration projects,” S&P said.

For ONGC, the lower gas prices will reduce EBITDA by 4-5 percent for the fiscal year ending March 2016, compared with earlier expectation. But the company’s financial ratios have headroom to absorb the impact.

In the case of Reliance, there is no impact because the government does not allow it to collect gas prices above $4.2 per mmBtu.

“Moreover, gas is now an insignificant portion of the company’s business,” it said.

The lower prices will reduce the government’s earning from royalty by about Rs 60 crore.

The price reduction, it said, will benefit retail gas consumers and the fertiliser sector because of lower feedstock cost.

“The gas price reduction will likely discourage capex in exploration and development of gas reserves in India, where most large finds are in deep water zones. Globally, several E&P companies have scaled back spending and put new exploration projects on hold amid low hydrocarbon prices,” S&P said.

ONGC has material gas reserves to be developed in its offshore fields. However, given ONGC’s mandate to secure the energy needs of the country, S&P expected the company to continue with its planned capex.

The company plans to invest more than Rs 40,000 crore in its deep water field in the Krishna Godavari basin.

“The profitability of such investments could reduce materially because of the lower gas prices. Investment by private sector oil and gas companies in India has been small and their capex commitments are likely to be uncertain because of the price revision,” it said.

S&P said clear and premium pricing will be crucial to incentivize production from logistically or operationally challenging fields, such as deep or ultra-deep water zones.

“Fast-track clarity on premiums for producing from difficult areas could encourage greater participation from various players and facilitate the introduction of advanced technologies in the sector,” it said.

(Disclosure: Firstpost is part of Network18 Media & Investment Limited which is owned by Reliance Industries Limited.)

PTI