Natural gas prices will soon double, if the new government decides to go ahead with the Rangarajan Committee recommendations. Will this happen? Who wins and who loses? A reality check.
It was an intervention from the Election Commission that has postponed the government´s decision to hike wellhead prices of natural gas, that should have kicked in from 1st April.
Under the Rangarajan formula, gas prices were expected to double from $4.2 per British thermal unit (mmBtu). A few analysts are confident that the the gas pricing mechanism will be implemented once the new political dispensation takes over, but questions still remain on whether gas prices will automatically go up under a new government.
According to the Rangarajan Committee´s recommendations (approved by the Cabinet Committee for Economic Affairs), the price of gas would be fixed by averaging the netback wellhead prices of Indian imports and the gas prices prevailing at the global trading hubs of the US, UK and Japan.
The immediate gainers from the new prices would be upstream producers like ONGC and Reliance Industries, who have been maintaining that the current gas prices are too low to allow for the monetisation of reserves to boost earnings.
According to Nomura Financial Advisory and Securities, ''We have been anticipating that the April gas price hike may become a victim of political rhetoric. For GAIL the expected cost increase due to the gas price hike was Rs 15-16 billion annually (Rs 8-9 for LPG, Rs 4-5 billion for petro-chem, and Rs 2-3 billion for gas transmission). However, GAIL was expected to get some relief on LPG (due to lower subsidy payouts) and transmission (the gas cost increase would be addressed in revised tariff which are due from November 2013).´
ONGC´s Director (Finance) AK Banerjee had earlier indicated that the company stands to gain around Rs 2,000 crore from every dollar per mmBtu increase in price. OIL estimates that every dollar per mmBtu increase in gas price adds Rs 400 crore to the company's topline and Rs 250 crore to its bottomline.
Nomura also expects that there would be no immediate impact on the earnings of city gas distribution companies like IGL and Gujarat Gas. However, the firm says: ´Gas price hikes are expected to be negative for these companies, as the hikes would have forced these companies to raise prices (to pass on costs), which would have impacted volume growth.´
Debasish Mishra, Senior Director, Deloitte in India, feels that the hike would be viable for power companies. ´A $1 hike in gas prices would necessitate a Rs. 0.36/ unit increase in electricity tariff. The Rangarajan Committee´s recommended price of $8 /mmBtu is a good base price as it is feasible for power companies to use gas at (a price point) up to $10/mmbtu. The bigger challenge in India is availability of domestic gas. On a long term, to promote more investments in exploration, (the) Government should come out with a market based pricing mechanism and a transparent allocation policy.´ Reliance Industries says: ´Close to 40 per cent of gas consumed in the country is imported in the form of LNG. Current price of LNG imported in the country is around $18 per mmBtu. Even at domestic gas price of $ 8 per mmBtu, imported LNG will be costlier by at least $10 per mmBtu, i.e., it will cost more than double the price paid to domestic gas producers.´
However, along with the fertilizer and power industries, a few other industries might feel the heat when the increased prices kick in. Reports indicate that many of the glass manufacturing units in the Firozabad-Agra industrial belt face closure if the prices of gas are doubled.
Barclays says in a note: ´Assuming the new government does not scrap the decision altogether-unlikely, in our view this could defer upside for gas producers by one quarter, cutting FY15e (estimates) gas realisations by $0.9/mmBtu or 10.5 per cent.´ The note says: ´Encouragingly, though, the decision also allows the government more time to deliberate on measures (such as a subsidy to state electricity boards) to address the affordability issue for gas-based power plants. Indeed, while this is important for ONGC (it sells 40 per cent of gas to this sector), lower offtake from the power sector could also have been a near-term headwind for Petronet LNG´s volumes if domestic gas that remained unsold had squeezed out higher-priced spot and short-term LNG.´
But there have been firm indications that if the UPA does not come back to power, the new dispensation might revisit the gas pricing mechanism. Narendra Taneja, BJP´s national convener of BJP´s energy cell has said, ´If we come to power, we would have to look at all the facts, all the realities on the ground, while keeping the interest of stakeholders in mind in particular consumers.´ Senior BJP leader Yashwant Sinha has said that there is a case to revisit the current gas pricing mechanism. He says, ´Unfortunately while both the Petroleum Ministry and Standing Committee were engaged in the task of examining the issue, the government went ahead and decided to increase the price of gas according to the formula suggested by the Rangarajan panel.´
The subsidy burden
Another thorny issue is that of subsidies. Research indicates that the total impact on the power sector is likely to be around Rs 46,000 crore per annum and the annual hit on the fertilizer sector would be nearly Rs 17,000, if gas prices are doubled. The government was planning to hike subsidies to both these sectors to negate the impact of the price hike.
The fertilizer industry consumes nearly 35 per cent of the gas used in the country. Any hike in gas prices would only add to the subsidy burden. Government estimates indicate that the additional subsidy burden for every $1 increase in price will be Rs 2,233 crore per annum for the fertiliser sector. The subsidy to power units is expected to be Rs 3,457 crore per dollar of hike. The main question here is whether the gains from higher profit sharing, royalty and taxes from the gas price hike would be enough to foot the subsidy bill.
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