Gas prices could more than double in 2016-17
Effect of benchmarking to global rates
Barclays Equity Research estimates the price will be $8.3 per million British thermal unit in 2014-15 as against the current rate of $4.2. This will rise to $9.1 in the following year and then to $ 9.4 in 2016-17.
Goldman Sachs has gone even a step ahead estimating gas prices at more than $10 per mmBtu by 2015.
“Prices will be revised quarterly and, in our view, will change by $0.1-0.5 per mmBtu for every $10 change in oil prices given the linkage to LNG pricing," Barclays said in a research note.
The government has decided to price all domestically produced gas by both public and private sector firms at an average price of LNG imports into India and benchmark global gas rates from April 1, 2014.
Of the total domestic gas volume of about 86 million standard cubic meters per day (mmscmd), three key economically sensitive sectors - power, fertiliser and LPG - consume about 67 mmscmd.
"We see additional burden for them of Rs 19,700 crore or 0.16 per cent of GDP," Morgan Stanley said.
"If this were to be completely passed on to end consumers, we believe electricity tariffs for a gas-based plant need to be moved about 45 per cent higher. The required increase in urea prices would be over 60 per cent," Morgan Stanley said.
ICICI Securities said the decision will "reignite investments in Indian exploration and production, especially development of offshore gas discoveries on the east coast and gradual alignment of industry demand (across sectors) to a higher gas price environment".
More than 30 trillion cubic feet of reserves in the Krishna Godavari basin can be developed at the new rates. "Economics for marginal gas fields, primarily owned by ONGC (and some by RIL), could also improve," it said.
ICICI Securities said sectors like power and fertiliser tend to avoid high-cost gas as an input due to systemic compulsions that restrict pass-through of costs.
"On domestic gas price hike, these sectors would now be forced to align themselves to a higher gas price base," it said.