last week, the Union Cabinet approved Kirit Parikh Committee’s recommendations for natural gas pricing. Going forward, natural gas produced from legacy fields will be priced at 10% of the Indian crude basket’s price, subject to dynamic floor and ceiling prices.
The initial floor price has been set at $4/mmBtu and the initial ceiling price has been set at $6.5/mmBtu. The ceiling and floor prices are set to go up by 0.25/ mmBtu per year after two years.
In its earlier proposal, the Committee had suggested a fixed floor price of $4/mmBtu, while the initial ceiling price was proposed to be $6.5/mmBtu with an annual hike of $0.5/mmBtu. The approved pricing mechanism will have a negative impact on CGDs, as it will increase the gas cost to USD6.5/mmBtu as long as the Indian crude basket remains above USD65/mmBt.
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The new mechanism is positive for ONGC/OINL as the floor price is higher than their cost of production, vis-à-vis selling gas at much lower realisation than the production cost for a long time in the older regime.
While the recommendations will help CGDs reduce their input costs in the near term, we do not expect margin accretion for CGDs as the benefit is expected to be passed on to consumers. The floor price of $4/mmBtu provides much needed respite to ONGC and OINL as they had to sell gas below the cost of production for quite a long time.