Gas price cut to help many sectors

The sharp reduction in natural gas prices will be positive for some important sectors of the economy but may present problems for some others. The government has cut the domestic gas price by 18 per cent to $4.24 per mmBtu for the October 2015-March 2016 period and this is a multi-year low. Gas prices are fixed according to a formula adopted last year and revised for every six-month period. The formula was arrived at on the basis of the gas prices ruling in gas-producing countries, as the country has 80 per cent dependence on imports. So, it is natural that the prices to be fixed in India should be low as gas prices have collapsed the world over in the last few months. The drastic fall in prices are mainly due to the global economic slowdown and the increased supply of shale gas. Commodities, in any case, have their price cycles, and the oil slope may not yet have found a stop.

Consumers of compressed and piped natural gas will greatly benefit from the reduced prices. Sectors like fertiliser and power generation, which get natural gas on a priority basis, will stand to gain much. Gas prices constitute more than 75 per cent of the cost of fertiliser production. The fall in prices will benefit the government most because its fertiliser subsidy burden will come down. The cost of power produced with the cheaper gas is also set to come down. But producers will be hit hard. ONGC, OIL and Gail will suffer major loss of revenues. The loss is estimated to be above Rs 1,000 crore for ONGC. More than the budgetary problems of these companies, what may be a matter concern is the impact of low gas prices on oil exploration and production. The low prices may make exploration unattractive and unviable. Foreign companies will be less interested in exploration in India than in the past. Auctions under the next round of explorations may therefore be affected.

The pricing formula was adopted last year after a lot of discussion and debate. It can still be criticised for linking domestic prices to global prices. But it should be noted that it is the drastic change in the global oil economy that has created an unfavour-able environment for exploration efforts. In fact, exploration will be disincentivised not just in India but all over the world. In any case, a section of
the economy stands to gain too. It is unlikely that the government will be inclined to review the formula now. It may not also be practical. 

Liked the story?

  • 0

    Happy
  • 0

    Amused
  • 0

    Sad
  • 0

    Frustrated
  • 0

    Angry