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India cuts gas prices by 18%

The well-head gas price has dropped to $3.82/m British thermal units (Btu) which could discourage investment in the fields

India has cut the well-head gas price by 18% to $3.82/m British thermal units (Btu), squeezing producers such as Oil & Natural Gas Corporation (ONGC), Oil India and Reliance Industries. The move may end up discouraging investments in new fields, which would eventually lead to higher dependence on costlier imports as lower prices boost demand, warned ratings agency Moody’s.

Low prices benefit power producers and fertilizer makers, but may deter exploration companies from investing and increasing output, essential for Prime Minister Narendra Modi’s target of cutting India’s dependence on imported energy to 50% by 2030 from 80% now.

India imports 36% of its gas needs. But "imports will continue to increase as low international gas prices stimulate demand for natural gas and low domestic prices discourage further investments by upstream players to explore and develop new gas reserves”, reports Moody’s.

The gas price cut, the government’s second since implementing its new gas pricing formula in November 2014, is valid for six months from 1 October and is credit negative for producers such as ONGC and Oil India. The national oil companies are already feeling the pinch from lower revenues and cash flows from low oil prices.

The sharp cut will hit ONGC hardest, the country’s largest producer of natural gas. Moody’s expects ONGC revenues to fall by about $300m (or 1.2% of total revenues for fiscal 2015, which ended March 2015) for the six-month period ending 31 March. The ratings agency sees Oil India’s revenues falling $33m (2.3% of total revenues for fiscal 2015) over the same period.

India reviews the price of gas half-yearly, using a formula capturing international trends. The gas-price formula is based on US, Canadian, UK and Russian gas prices. A shale production boom in the US, a slide in Russia’s ruble and a tumble in crude oil, a common index for gas rates, have depressed prices. Natural gas futures on the New York Mercantile Exchange have dropped about 37% in the past year.

With benchmark prices still low, the government-mandated domestic natural gas price is likely to remain muted over the next 12-18 months. Moody’s assumes US Henry Hub natural gas prices for 2016 at $3/mn Btu and $3.25/m Btu for 2017.

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