Natural gas prices likely to reach record highs

Dnyanada Kulkarni
/ Categories: Trending, DSIJ News
Natural gas prices likely to reach record highs

India is likely to raise prices of domestic natural gas for the 4th consecutively time. This will bolster the earnings of the producers of natural gas.

Beginning April 1, the government may increase the prices of natural gas to US$ 3.74 per million British thermal units for six months. This would be the highest price in over three years. Ever since the government introduced the administered pricing mechanism in November 2014, the gas prices have fallen nearly 51 per cent.

The demand for fuel is on the rise. Alternatives to conventional polluting fuels are in demand. As such, India is likely to double the share of natural gas in its primary energy basket to 15 per cent in the next few years. Moreover, gas is cheaper than crude. Since India’s primary import constitutes crude, it can reduce its import bill substantially by switching to natural gas.

Oil and gas companies are sure to benefit measurably by the price hike. The most prominent beneficiaries include Oil and Natural Gas Corporation (ONGC) and Oil India as they produce and sell approximately 83 per cent of India’s total gas. The higher gas rate will enhance their earnings per share by 7 per cent and 9 per cent, respectively. This is an estimate using the assumption that everything else barring the price hike remains constant.

The remaining 17 per cent of India’s total gas comes from private producers such as Reliance Industries Ltd., Vedanta Ltd. and Hindustan Oil Exploration Company Ltd., amongst others.

The recent price hike will escalate prices only slightly above ONGC’s average cost of production. ONGC has been struggling to recover the total cost of production at current prices, thereby plunging itself into losses. For the financial year ended March 2018, the average cost of production stood at US$ 3.59 per million British thermal unit. The losses have hampered the company’s ability to fund capital expenditure plans as well as future development projects.

While the price hike bodes well for oil and gas companies, it will exert pressure on the margins of the power sector and sponge iron makers. This is because both use natural gas to generate energy. The cost of manufacturing urea and petrochemicals where natural gas is used as a feedstock will also increase. Similarly, the prices of compressed and piped natural gas will also climb.

On Thursday, the shares of ONGC opened at Rs. 149.70, and hit a high and low of Rs. 151.50 and Rs. 149.60, respectively. At 3:20 pm, the stock was trading at Rs. 151.45, up 1.24 per cent.

Similarly, the shares of Oil India Ltd. opened at Rs. 176.10, and hit a high and low of Rs. 178.80 and Rs. 175.60, respectively. At 3:21 pm, the stock was trading at Rs. 177.65, up 0.88 per cent.

 

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