Gas Pricing Needs to be Fixed Quickly, Say Brokerages
New Delhi: As the government deferred a revision in natural gas prices for the third time, brokerages said pricing needs to be fixed quickly as non-remunerative rates and policy uncertainties had led to sluggish domestic output.
Gas prices will continue to be maintained at $4.2 per million British thermal unit for another 45 days after the September 24 decision of the Cabinet to delay a decision on new gas price guidelines until November 15. (Read full story)
"In our view, the government needs to quickly fix the pricing policies for oil and gas as part of a broader objective of enhancing India's energy security," Kotak Institutional Equities said in a report.
"Non-remunerative pricing and policy uncertainties have led to sluggish domestic production, resulting in rising energy deficit and imports."
The current energy policies that constrain domestic production and inadvertently encourage energy imports at global prices should be reviewed, it said.
UBS said it believed gas prices will be increased as "the rationale for high cost of developing new gas fields has been well debated, and domestic production needs to be raised to offset imports of higher-priced LNG".
UBS as well as Bank of America-Merrill Lynch expected a gas price of around $6.5 per mmbtu to be approved as opposed to $8.3-8.4 per mmBtu rate recommended by the Rangarajan Committee.
"While there is no clarity on the implementation timelines, we assume increased prices to be effective from January 2015 onwards or latest by April 2015," UBS said.
Kotak said low natural gas prices will prevent any meaningful reinvestment in existing fields and investments in new discovered fields and unexplored regions, which is necessary to sustain and grow domestic production.
"Higher natural gas (and crude oil) prices are essential to sustain the extant production of the upstream companies, given rising operating costs and significant reinvestment in mature fields to simply sustain production," it said.
A comprehensive market-based pricing regime for all forms of energy is ultimately required to remove inefficiencies in the energy chain, rationalise domestic consumption and incentivise indigenous production.
"A market-based pricing regime will adequately incentivize domestic producers, while taking care of the interests of consumers; a consumer will end up paying higher prices for energy imports if indigenous production continues to lag domestic demand as has been the case historically. This situation will continue in the future too," it added.
Bank of America-Merrill Lynch said the Supreme Court is hearing two public interest litigations against a price hike for gas from Reliance Industries' eastern offshore KG-D6 block.
The Supreme Court had in its last hearing on September 18 asked the government to clarify its stand on the gas price hike decision taken by the UPA government, which was challenged by two appellants.
The government's lawyer had informed the Supreme Court that the decision on gas pricing would be taken by the government and an affidavit would be filed. The top court has posted the matter for further hearing on November 14.
"We expect the decision on gas pricing to be taken before the SC (Supreme Court) hearing due on November 14," it said, adding the head of the bench hearing the PILs has "indicated in our view that the SC may not play any role on the gas pricing issue, especially if the NDA government rejects the gas price formula approved by the UPA government and fixes the gas price at a lower level".
It said the NDA government may fix the gas price at $6-7 per mmBtu vis-a-vis $8-9 as per the UPA government-approved formula.
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