Gas price fineprint: ONGC, OIL may lose out, RIL may cut investment

The devil is in the detail. After the initial euphoria over the estimated benefits from the gas price reform, gas producing companies have now started counting the likely losses they may have to incur because of the government's half baked step.

According to experts, state-run companies such as ONGC and Oil India will be hurt as they are likely to share part of the government's increased fertiliser, power and fuel subsidies. However, it is still not clear how much of the additional subsidy will the companies be asked to share, if at all.

 Gas price fineprint: ONGC, OIL may lose out, RIL may cut investment

Reuters

Brokerage Barclays, which expects gas prices to nearly doubleto US$8.3/mmbtu from FY15E, to result in a sharp increase in the cost of power.

It estimates the current cost of power generated by gas-based power plants atprevailing gas prices at Rs 3.2 per unit. It expects this to increase toRs 5.3 per unit in FY15 and Rs 5.7 in FY16. Including transmission and distribution costs,it sees the power cost for an state electricity board (SEB) to be Rs 6.0/6.4 per unit in FY15 and FY16, respectively.

"We do not believe these prices are viable for SEBs. Since gas prices are denominated inUS$, exchange rate volatility could also be a negative factor," the brokerage said in a note on 1 July.

Salil Garg, director-corporates, India Ratings, told DNA that ahigher gas price ($8.4 permmBtu) could also lead to an additional burden of Rs 8,300 croreon fertiliser players and Rs 7,800 crore on gas-based power generators.

For the already sick fertiliser companies, the higher burden would lead to an erosion of margins. And unless the finance ministry agrees to foot the bill, there may be a hike in tariffs for consumers of gas-based power.

Meanwhile, according to a report in Business Line,Reliance Industries (RIL) is mulling a cut back on its $10-billion investment plan for the domestic oil and gas sector over the next five years if the government is allowing the gas producers to revise prices only once in three months, which amounts to indirect regulation.

RIL fears that it may not be easy to convince the company board for any further investments, until there is some stability on the risk element. Thishas been compounded by the Finance Ministry asking the Petroleum Ministry to cap the benefit of higher gas prices for Reliance on the plea that the company has missed key supply commitments from its mammoth D6 gas project.

The report quotes company officials as saying that the government is deviating from the commitment it had made in the new exploration licensing policy.

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Updated Date: Dec 20, 2014 22:16:52 IST