Dipping domestic gas and crude oil prices a double whammy for upstream producers: ICRA


New Delhi [India], Apr 2 (ANI): The domestic gas price notified at 2.39 dollars per mmbtu (million British thermal unit) for H1 FY21 is a sharp decline of 26 per cent from the price of 3.23 dollars per mmbtu applicable for H2 FY20 and the lowest since the institution of modified Rangarajan formula, according to investment information firm ICRA.
As per an ICRA note, the decline in domestic gas price is in line with the fall in global gas indices over the reference period. Asian spot prices of LNG have declined to 3 dollars per mmbtu, less than half of the levels they were at the same time last year, due to warmer-than-usual winters, increasing supplies and rejection of cargoes by Chinese companies owing to slowing demand on account of the outbreak of coronavirus.

About 29 million tonnes of liquefaction capacity was added in CY19 over 37 million tonnes added in CY18. Even though LNG trade grew by the highest ever at 40 million tonnes in CY2019, the demand was outpaced by supply depressing spot prices.

Additionally, the outbreak of coronavirus has crimped global demand. The extent of its spread and impact on global demand remains a key variable to watch out for.
Also on March 8, Saudi Arabia slashed its oil prices and pledged to increase production after Russia refused to join the OPEC in a production cut leading to a price war.
Moreover, demand for petroleum products has seen a sharp decline (10 to 20 per cent) across major global economies, resulting in lower oil demand and putting further pressure on prices. Accordingly, low oil prices will also weigh on LNG prices.

“At such low gas prices, gas production remains loss-making proposition for most fields for the upstream producers notwithstanding some decline in oil field services and equipment costs,” said K Ravichandran, Senior Vice-President and Group Head for Corporate Ratings at ICRA. Nonetheless, the significant depreciation of Indian rupee against US dollar in the past few months provides some support to realisations of gas producers, he said.

“Going forward, the supply glut is expected to keep prices of domestic gas low in the near to medium term leading to poor returns even as domestic gas producers such as ONGC and RIL-BP ramp up gas production significantly,” said Ravichandran. As regards the impact on the city gas distribution (CGD) sector, Prashant Vasisht, Vice President and Co-Head for ICRA’s Corporate Ratings, said the shutdowns resulting from COVID-19 pandemic are negative in terms of the overall sale volumes for CGD players in the near term.
Amid this, the reduction in gas price should result in a cut in CNG and PNG (domestic) prices by the CGD players. However, their sales will be significantly impacted in the near term due to temporary closure or partial operations of their industrial customers.


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