Oil and gas stocks up after govt doubles domestic natural gas prices

Shares of domestic oil and gas exploration companies were up 1-3% on Friday after the government raised the price of domestic natural gas in line with global benchmarks.

The Ministry of Petroleum and Natural Gas’ (MoPNG) petroleum planning and analysis cell (PPAC) notified a 110% increase in natural gas price to $6.1 per mmBtu for six months starting April 2022 through September. The gas price ceiling previously stood at $2.9 per mmBtu. 

Shares of Aban Offshore, an Indian offshore drilling service provider, were up over 3% to trade around Rs 48 apiece.

State-owned ONGC, which produces half of India’s oil and gas, was up more than 1%, while GAIL India Ltd, Petronet LNG and Indraprastha Gas Ltd were up between 1% and 1.5%.

Reliance Industries Ltd was also trading in the green amid some volatility.

The BSE Oil & Gas index was quoting up 1.36% at 18,995.25 in afternoon trade on Friday.

According to Prashant Vasisht, ICRA Co-Head (Corporate Ratings), an increase in natural gas prices will provide a boost to the earnings of gas producers and exploration companies such as ONGC, Oil India as well as RIL.

“The domestic gas price increase was driven by the significant run-up in the prices of gas at global hubs. This provides relief to Indian upstream producers as at earlier prices, gas production was a loss-making proposition for most fields for them,” said Vasisht.

The gas price ceiling for extracting natural gas from challenging fields — discoveries from deepwater, ultra-deepwater and high pressure-high temperature fields — was also raised by 62% to $9.92 per mmBtu from $6.13 per mmBtu earlier.

Domestic natural gas prices are revised on a bi-annual basis — April-September and October-March — through the administered pricing mechanism based on gas prices in the international markets of the US, Canada and Russia (Henry Hub, Alberta Gas Reference, UK’s NBP and Russia Gas).

The petroleum ministry calculates average international gas prices for the preceding year and further calculates the price with a lag of one quarter.

Research and ratings agency CRISIL observed that international natural gas prices for immediate deliveries have been witnessing an uptick since August 2020 — after hitting all-time lows of $2 per mBtu in April that year — owing to a combination of factors such as demand recovery after Covid lockdowns as well as supply constraints from the US.

These factors coupled with the geopolitical tensions between Russia and Ukraine have pushed gas prices over $30 per mmBtu in the fourth quarter of 2021, it said.

Check out: Explained: Why Russia is offering crude to India at deep discount and its possible implications

Inflationary concerns

While the price hike bodes well for gas producers, it will add upward pressure on commodity prices at a time annual retail inflation exceeded 6% for the second consecutive month in February 2022. 

Sectors like fertilisers and the city gas distribution, who are the major users of natural gas, are also expected to be impacted. The city-gas companies will have to pass on the higher price burden to the end consumer, which includes households using piped natural gas and vehicles using compressed natural gas.

Already, the price of liquefied petroleum gas (LPG) for commercial use has been raised by Rs 250 for a 19-kg cylinder to Rs 2,253. However, domestic LPG cylinder rates remained unchanged at Rs 949.50 for a 14.2 kg non-subsidised LPG cylinder.

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