News Detail

The international natural gas future prices have had a steep fall from somewhere between $4.4 to $4.5 mmBTU (million British Thermal Units) on July 4 to $3.9 to $ 3.7 mmBTU on July 19. The collapse of prices has primarily been caused by low usage of gas for power generation in Eastern America and Europe. As demand for gas remains subpar, gas storage facilities are re-filling at a rapid rate, turning gas back into buyer’s market. That’s a quick change from six months ago when gas was being consumed at a faster-than-normal rate. And the resulting price collapse has left many to wonder: Will gas prices keep plunging or have they hit the bottom?

A Nasdaq report says, “Tepid demand is likely to lead to more increases in the amount of gas in storage, and with each weekly update from the Energy Information Administration (EIA), gas prices will likely move down another leg. A commodity needs a catalyst to reverse direction, and natural gas prices have no positive catalysts on the near-term horizon. Also, recall that gas prices were historically closer to $3 per thousand cubic feet (MCF) before last winter’s polar vortex, so there’s no reason to think that the current $4 per MCF price range represents any sort of bottom.”

Meanwhile, the Government has decided to set aside UPA-proposed Rangarajan formula for gas pricing as was suggested by the panel under then Prime Minister’s Economic Advisory Council headed by C Rangarajan. Times of India reports, “a new panel under Suresh Prabhu, the architect of power sector reforms during the Atal Bihari Vajpayee Government, is being set up to come up with an alternative mechanism.”

The report further adds that, “The (Petroleum) Ministry suggested a deadline of August 31 for completing discussions with explorers and gas consumers such as urea and power plants. This is being done to allow the Government ample time to examine the panel’s report and decide on the new formula by October 1.”

That “Gujarat State Petroleum Corp Ltd (GSPC) wants to price gas that it will produce from Deen Dayal West (DDW) gas field in block KG-OSN-2001/3 by third quarter of 2013, at a minimum of $8.50 mmBTU, excluding local taxes and margin”. A month before, the same agency said that, “Oil ministry has moved a cabinet note for nearly doubling the price of natural gas produced by state-owned ONGC and OIL to $8-8.5 mmBTU in the current year itself and for Reliance Industries Ltd (RIL) from April 2014”.

While all these gas producers have been seeking a similar pricing, a general perception was created that it was RIL which was pressing for a higher gas pricing. Annually, the fuel subsidy costs almost $24 billion, which leaves a yawning budget deficit.

While the present Government had opposed the Rangarajan formula on the ground that hefty hike in fuel price creates pressure on power consumers and farmers, the TOI report adds that in this scenario, top Government sources said it may not be incorrect to assume the panel would be looking to work backwards to arrive at an acceptable price.

Some suggest that another option can be to look at rupee-pricing of gas, which has been proposed by the Finance Minister Arun Jaitley during a Cabinet discussion on deferring gas price hike. His argument was based on the fact that this might help cushion prices against foreign exchange volatility.

However, there could be little chances that this would be an acceptable proposition for these gas producing enterprises. A Financial Express report says that, “the production sharing contract says the gas price should be in a freely convertible currency. The matter is how to compensate for the costs incurred in dollars. In two weeks, the Ministry should be in a position to take a view on this,” a senior official. Legal experts, however, say, “the Government cannot unilaterally make changes in the PSC as RIL bagged the contract in a global competitive bidding process. Any such move can be challenged in courts,” a Supreme Court lawyer said.

In such conditions, pricing in Indian currency has very meagre chances. However, when international prices are low, Government’s permission to raise prices can create a backlash among consumers and farmers. PSUs and private players in natural gas production business are probably waiting with bated breath till the Government makes a final announcement on this issue.

Source-On Request