The state-owned Oil and Natural Gas Corporation (ONGC) is likely to see its annual revenues increase by $3 billion (about Rs 23,000 crore) from more than doubling the price of natural gas it produces, while Reliance Industries may see $1.5 billion will gain (Rs 11,500 crore) more revenue, according to a report.
The government increased the gas price paid to oil and regulated field producers from $2.9 per million British thermal units to $6.10, a record high from April 1. For difficult fields, such as Reliance deep-sea fields, the price is up 62 percent to $9.92 per mmBtu (UK thermal unit).
“A three-pronged deficit in oil markets (inventory, capital expenditure and spare capacity) coupled with rising domestic gas production after nearly a decade of declines is setting the stage for a supercycle in profitability,” Morgan Stanley said in a note.
Gas accounts for 58 percent of domestic gas production for ONGC, and every $1 per mmBtu change in gas price affects ONGC’s revenues by 5-8 percent.
“We foresee a $3 billion increase in earnings in 2022-23 (April 2022 to March 2023) and, more importantly, an improvement in ROCE to above 20 percent after more than a decade,” it said.
Gas prices for difficult fields (deep water, ultra-deep water and high-pressure areas with high temperatures) have increased by $3.8 per mmBtu to $9.9 and will apply to the production of ONGC of KG-DWN-98/2, which are expected to contribute about 14 percent of domestic gas production by 2023-2024.
Reliance’s gas production from its deep-sea KG-D6 field has reached 18 million standard cubic meters per day, which is expected to increase to 27 mmscmd in 2023-24, with an increase in production from new and existing clusters.
“We expect a profit increase of $1.5 billion with gas price increases in 2022-23,” it said.
Morgan Stanley forecast a further 25 percent gain in its next review scheduled for October 2022, as tight inventories keep four global benchmark prices at high levels.
India sets domestic gas tariffs based on a formula that uses prices from the past 12 months at the global gas hubs NBP, Henry Hub, Alberta and Russia Gas.
In a note, IIFL said that despite the price adjustment, domestic gas prices are 45-50 percent lower than land prices of imported LNG. “Politics will be tested in the second half of 2022-23 (October 2022 to March 2023), when a similar price increase is expected.”
The rise in gas prices bodes well for ONGC, Oil India Limited (OIL) and Reliance, which account for the bulk of India’s domestic gas production.
Hetal Gandhi, director of Crisil Research, said that with improving investment in production infrastructure, domestically produced gas is currently helping to meet nearly 50 percent of annual domestic demand. Based on an allocation system followed by the government, the main consumers of domestic gas are the town gas distribution sector (including CNG and domestic PNG), fertilizers and electricity.
“The increase is expected to affect the town gas distribution (CGD) entities as it will drive up domestic prices of compressed natural gas (CNG) and natural gas pipelined to kitchens. We do not expect substantial demand erosion from the transportation sector as CNG will to do.” are still competitive compared to petrol and diesel. We also expect domestic PNG to remain competitive against domestic LPG despite any price increase. However, the margins of CGD entities will be significantly impacted, with a contraction of 300 basis points in fiscal 2023,” he said.
Higher gas prices will also further increase the government subsidy for fertilizer from Rs 14,000 crore last fiscal year, which saw a significant increase.
“The increase, which comes at a time when relations between Russia and Europe over gas supply have deteriorated, will be controllable for natural gas prices and therefore for the imported part of the fuel, which affects sectors such as industrial PNG, refineries and petrochemicals.” he added.