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How likely is a uniform price for natural gas? - Views on News from Equitymaster

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How likely is a uniform price for natural gas?

Dec 2, 2009

Most sectors in India have experienced at least some degree of liberalization in the recent years. But one area that sticks out like a sore thumb is price control over petroleum products. Changes have been made on paper, but prices of petrol, diesel, LPG, kerosene, natural gas and fertilisers are still set by the government. In other words, prices are still administered. Natural gas - multiple prices
Take the pricing of natural gas in India. There is no one 'market' price. There are almost a dozen different prices. The government had decided to price Reliance Industries' production from the KG basin field at US$ 4.2 per m British thermal units (mbtu). At the same time, state owned oil & gas major ONGC continues to price its gas production at almost 1/3rd the rate.

That is about to change. The oil ministry plans to hike administered gas prices by about 33%. This is part of the plan to move towards market determined prices. It will also be the largest ever jump in administered prices. It is also the first time natural gas prices are being changed in five years.

Impact across the value chain
This move will affect 40% of India's natural gas output of 140 m standard cubic meters of gas per day. It is a positive development for producers of natural gas such as ONGC and Oil India. For years, they have been complaining of the fact that the gas business doesn't make any money due to the low administered prices. A market oriented price also sends positive signals to investors. India is looking to attract investment into the sector through the NELP auctions

However, users of natural gas like fertiliser and power companies will not be too happy. In theory, power companies can pass on fuel costs, while fertiliser companies get government subsidy. In reality though, they cannot easily pass on the higher prices to their consumers. Hence, any hike in input costs hurts their margins. Moreover, higher fertiliser subsidy hurts the fiscal deficit situation. Every hike of US $1 per mbtu in administered gas prices raises the cost of fertiliser by about US$ 11.3 per tonne. For FY10, fertiliser subsidy is pegged at Rs 500 bn. It is likely to fall short by Rs 200 bn. Higher natural gas prices will push the figure higher.

Currently Mercados EMI, of Spain, has been hired to study the possibility of a uniform price for natural gas in India. But given the opposition from the power and fertiliser ministry, it will take a great deal of convincing before a uniform price becomes reality.

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