New Gas Pricing Mechanism Positive For ONGC, Oil India; Negative For CGDs: Motilal Oswal

Motilal Oswal Report

On April 06, 2023, the Union Cabinet approved the Kirit Parikh Committee’s recommendations for the pricing of natural gas. Going forward, natural gas produced from legacy fields will be priced at 10% of the Indian crude basket’s price, subject to dynamic floor and ceiling prices.

The initial floor price has been set at $4/metric million British thermal unit and the initial ceiling price has been set at $6.5/mmBtu. The ceiling and floor prices are set to go up by 0.25/mmBtu per year after two years. In its earlier proposal, the Committee had suggested a fixed floor price of $4/mmBtu, while the initial ceiling price was proposed to be $6.5/mmBtu with an annual hike of $0.5/mmBtu.

The new pricing mechanism will be negative for city gas distributions as it raises the gas cost to $6.5/mmBtu as long as the Indian crude basket is above $65/mmBtu.

In the older administered pricing mechanism pricing regime, we would have expected a sharp correction as U.S. Henry Hub has already come down to ~$2/mmBtu.

The new mechanism is positive for Oil and Natural Gas Corporation Ltd./Oil India Ltd. as the floor price is higher than their cost of production, vis-a-vis selling gas at much lower realisation than the production cost for a long time in the older regime.

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