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Prices of natural gas, which is used to produce fertiliser and generate electricity and is also converted into CNG for use in automobiles as fuel and cooking gas for households, are set every six months -- on April 1 and October 1 each year.
Natural gas prices on Tuesday were cut by a steep 26 per cent to its lowest rate since the pricing was made formula-driven in 2014, a move that is likely to translate into lower CNG and piped cooking gas prices but also make a huge dent in revenues of producers such as ONGC.
Oil Ministry's Petroleum Planning and Analysis Cell (PPAC) said the bulk of India's existing gas production will be priced at $2.39 per million British thermal unit for the six-month period beginning April 1, down from $3.23 as of now.
This will be the second reduction in six months to the lowest since 2014.
The price of gas produced from difficult fields such as deepsea too has been cut to $5.61 from $8.43 per mmBtu now.
Prices of natural gas, which is used to produce fertiliser and generate electricity and is also converted into CNG for use in automobiles as fuel and cooking gas for households, are set every six months -- on April 1 and October 1 each year.
A formula based pricing came into existence in November 2014 when the Modi government decided to use prevailing prices in gas surplus countries to fix rates for the fuel produced in the world's fourth-largest importing nation.
The rates, besides dictating the price of urea, electricity and CNG, also decide the revenue of gas producers such as Oil and Natural Gas Corp (ONGC).
Natural gas price was last cut by 12.5 per cent on October 1.
Rates were cut to $3.23 per mmBtu from $3.69 earlier.
For difficult fields, the rates were cut from an all-time high of $9.32 per mmBtu to $8.43.
Sources said the reduction would impact revenues of India's biggest producer ONGC as well as Reliance Industries and its partner BP plc, which plan to start gas production from their 'second-wave' of discoveries in eastern offshore KG-D6 block from mid-2020.
ONGC's revenue and earnings from the gas business will fall by around Rs 3,000 crore because of the price cut, the sources said.
A formula-based pricing was adopted in 2014 soon after the $4.2 per mmBtu rate fixed for Reliance's KG-D6 gas for five years expired.
The rates at the first revision were $5.05 when in the subsequent six monthly reviews kept falling till they touched $2.48 for April 2017 to September 2017 period.
Subsequently, they rose to $3.69 in April 2019 to September 2019 before being cut in October 2019.
This pricing was way too low to make the production of gas from difficult fields such as deepsea.
So the government in April 2016, gave a ceiling for the gas from such fields.
The ceiling in April 2016 was $6.61 which rose to $9.32 in April 2019 before being cut to $8.43 in October.
The cut in price will lower the earnings of producers like ONGC but will also lead to a reduction in the price of CNG, which uses natural gas as input.
It would also lead to lower cost of natural gas piped to households (PNG) for cooking purposes as well as of feedstock cost for the manufacturing of fertilisers and petrochemicals.
Gas prices in India are determined by taking a volume-weighted annual average of the prices prevailing in Henry Hub (US), National Balancing Point (UK), Alberta (Canada) and Russia with a lag of one-quarter.
ONGC is India's largest integrated oil and gas company accounting for 75 per cent of crude oil and natural gas production by volume, and 17 per cent of domestic refining capacity.
Natural gas is a key raw material for the manufacturing of urea and comprises nearly 70 per cent of the total cost of urea production.
For the fertiliser sector, nearly 42 per cent of the gas requirement is met through domestic gas, while the remaining is met through regasified liquefied natural gas (R-LNG) imports.
The cost of production of urea changes by around Rs 1,600-1,800 per tonne for every $1 per mmBtu change.
The price cut would thus reduce the subsidy outgo for the government by Rs 800 crore in the first half of FY21, they added.
Photograph: PTI Photo