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Gas production for RIL-BP and ONGC remains a loss-making proposition: Icra

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MUMBAI: The latest domestic gas price revision to $ 1.79 per million British thermal metric units (mmBtu), for April-September, is the lowest and is unfavorable to domestic producers even though it will benefit consumers, a the rating agency Icra said in a note.

The price cap for gas produced from the deep water, ultra deep water, high pressure and high temperature fields was also lowered to $ 3.62 per mmBtu for the period, down 10.8% sequentially. .

Going forward, the glut of supply is expected to keep domestic gas prices low in the short to medium term, leading to mediocre yields even as domestic gas producers such as ONGC and RIL-BP dramatically ramp up production. gas, ”said Sabyasachi Majumdar, Senior Vice-President & Group Head, Corporate Sector Ratings, Icra.

For every $ 1 per mmBtu price change, the production cost ranges from 60 to 65 pais per unit for gas-based power generation projects at the prevailing rupee dollar exchange rate.

The lack of a floor and low and sustained prices make exploration and production unsustainable, even for benign geologies, as seen in recent years after the implementation of the modified Rangarajan formula.

As a result, low natural gas prices are negative for upstream businesses as they hurt revenues, profitability and accrued liabilities. The incumbents called on the government to set a floor for gasoline prices.

In a way of relief, the weakness of the Indian rupee against the US dollar will likely ease the achievements of gas producers, but only to a certain extent.

Spot prices for LNG (liquefied natural gas) had exceeded $ 30 per mmBtu in February 2021 due to rising oil prices, unplanned disruptions to export facilities in several countries, multiple cold spells, high shipping rates and delays in the Panama Canal.

Although spot prices have fallen to $ 6 to $ 6.5 per mmBtu, low inventories at the end of winter will support prices, as will demand, as North Asia and Europe seek to replenish. storage. Nevertheless, the supply overhang remains with a liquefaction capacity of around 37.6 MTPA (million tonnes per year) added in 2019 and 27.8 MTPA in 2020, not to mention the capacity additions until 2025. will exceed the additional demand that will weigh on gas prices.

From a consumer perspective, low gas prices are positive and will result in a competitive cost of production for domestic gas-fired power generation projects. Given the nature of the cost plus power purchase agreements (PPAs) related to gas-based power projects, the benefit should be passed on to customers, primarily utility distribution (discoms).

However, the benefits will be limited for discoms, given the moderate use of gas-fired power plants in the country, with an average annual PLF (plant load factor) of 22-25% in insufficient supply.

In the first eleven months of FY21, gas supply from domestic sources remained low at 22% of the amount allocated to gas-based power generation units, according to data from the Central Electricity Authority. .

In addition, with the rise in spot LNG prices, consumption of gas-based power projects fell to 2.62 MMSDCM in February from 11.85 MMSDCM in October of last year.

For the fertilizer sector, nearly 36% of gas needs are met by national sources, while the rest is covered by imports of regasified LNG. The sector is supplied with gas at bundled prices, which take into account the weighted average of domestic prices and R-LNG.

In the absence of a change in domestic prices, pooled prices will remain at current levels, although LNG futures prices have increased over the past two months as crude oil prices firmed.

The overall pool price is expected to remain in the $ 9.5-10 per mmBtu range for fiscal 2022, if crude oil prices remain at current levels.

According to Icra’s estimate, for every $ 1 per mmBtu increase in the pool price, the subsidy requirement for the urea sector increases from Rs 4,500 to Rs 5,000 crore. With pool prices at these levels, the subsidy budget for the urea sector will be adequate for FY22.

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