No Change In Gas Pricing Formula; Rates Below Output Cost

The government on Wednesday ruled out changes in the formula for pricing of domestic natural gas even though the formulation has driven down rates below the production cost.

The NDA-government had in October 2014 fixed a formula based on rates prevalent in gas-surplus economies of U.S./Mexico, Canada and Russia to price gas produced in a import dependent economy.

As rates slumped in the near stagnant gas-surplus economies, rates were cut four consecutive times, the last being on October 1 to $2.5 per million British thermal unit.

"The formula approved in October 2014 stands... There will be no changes in that," Oil Minister Dharmendra Pradhan told reporters in New Delhi.

He was asked if the government was considering changes in the formula by looking at demands for a floor or minimum price for producers like Oil and Natural Gas Corp Ltd. (ONGC) and Oil India Ltd. which are making losses at current rates.

"That formula stands," he said categorically.

While originally the formula was to apply to all existing as well as future production, the government earlier this year made some course correction to allow limited pricing freedom to yet-to-be-produced gas from difficult areas like deep sea or high-pressure-high-temperature fields.

Gas produced from difficult fields was allowed a rate capped to maximum price of alternate fuel. This rate for six month beginning October 1 was fixed at $5.3 per MMBTU.

Rating agency Fitch in a note on Wednesday said while the lower gas prices will not significantly hurt the borrowing capacity of Oil India Ltd, it will be selling natural gas at a loss.

Price of natural gas produced by ONGC, OIL and Reliance Industries locally was cut by 18 percent to $2.5 MMBTU based on its gross heat value for 6-month period from October 1.

On net heat value basis, the price will be $2.78.

The rate compares to average cost of production of about $3.59 per MMBTU for ONGC and $3.06 for Oil India, without taking into account return on capital.

As per a new mechanism approved by the government in October 2014, the price of domestically produced natural gas is to be revised every six months – April 1 and October 1 – using weighted average or rates prevalent in gas-surplus economies of US/Mexico, Canada and Russia.

For October 1, 2016 to March 31, 2017, the rate has been fixed at $2.5 per MMBTU compared to $3.06 per MMBTU previously. The price of gas between October 1, 2015 and March 31, 2016 was $3.81 per MMBTU and $4.66 in the prior six month period.

Next change is due on April 1.