The reduction of domestic gas prices in India over the next six months could lead to losses for upstream businesses according to new analysis, Kallanish Energy reports.
Last Wednesday, the Indian Ministry of Petroleum and Natural Gas confirmed it cut its domestic natural gas price by 25.1% to $1.79 per million British thermal units (MmBtu) for the six-month period with effect from October 1. This is down from $2.39 per MmBtu in the previous April-September period, which ended on March 31.
According to analysis from Fitch Rating’s Indian branch, India Ratings & Research (Ind-Ra), the price cut could lead to “significant losses” for upstream gas companies such as Oil India and Oil and Natural Gas Corporation. This is due to a “substantial” fall in the benchmark indices during the first quarter of India’s financial year 2020.
Based on the average gas price during financial year 2021, which is stated as $2.1 per MmBtu, Ind-Ra estimates that the cumulative losses from the gas segment for these companies could exceed INR75 billion ($1.02 billion).
The analysis also found that gas end-user industries, specifically city gas distribution (CGD), fertilisers and power, could see improved profitability. However, it also noted that a new gas pricing framework is “on the anvil”, which would could result in beneficial outcomes for upstream companies and a “low-to-medium” negative impact on other sectors.
Ind-Ra states that the profitability of both upstream firms remains dependent on the “policy guidelines for domestic gas pricing and the quantum of duties, cess and taxes collected on crude oil in the current depressed price scenario.”
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