Since the government-mandated rates have gone down and now stands at the lowest in the last decade, ONGC has said on Friday that they are losing ₹ 6,000-7,000 crore on natural gas business. Oil and Natural Gas Corp (ONGC) director (Finance) Subhash Kumar said that the government-mandated rates are a lot lower than the cost of production of $ 3.5-3.7 per million British thermal units.
The reduction of gas prices accounts for huge losses for companies. Every dollar reduction in gas prices generates a revenue loss of about ₹ 5,200 crores and a ₹ 3,500 crore on profit.
ONGC director Subhas Kumar had also said, “Our losses will be in the order of Rs 6,000-7,000 crore in current fiscal.”
ONGC had been generating a loss on the 65 million standard cubic meters per day of gas it produces from domestic fields after the government in November 2014 introduced a new gas pricing formula that had “inherent limitations” as it was based on pricing hubs of gas surplus countries such as the US, Canada, and Russia, as reported by Energyworld.com.
The formula that sets the gas prices takes into account factors such as, the volume-weighted annual average of the prices prevailing in Henry Hub (US), National Balancing Point (the UK), Alberta (Canada), and Russia with a lag of one-quarter.
The price of the natural resource which is generated by this formula is revised twice a year. The rate for the period that began on the 1st of October was taken down by 25 percent to $ 1.79 per mmBtu.
However many, including the director of ONGC hoped that the government would act on the firm’s request to set the prices such as the floor price would be set to check losses.
ONGC chairman and managing director Shashi Shanker also said that the current pricing does not cover the cost and because of this, the company is incurring losses. Also, he said that the company had already made a representation to the Ministry of Petroleum and Natural Gas for suitable amendments to the formula. He said, “Ministry is seized of the matter. They are favorably inclined and a committee has been constituted to look into this. There is talk of a floor price and changes in the formula itself by linking the rate to relevant market benchmarks such as JKM. I cannot comment on what shape it will take but we are certainly hopeful.”
He also added that prices have to be remunerative if the domestic output has to be raised.
$ 1.79 per mmBtu rate applies to gas produced from fields given to the company on a nomination basis. However, ONGC has the freedom to set prices on blocks and areas it had won in auctions since 1999.
The chairman and managing director of ONGC also believe that the freedom that the government granted earlier this year would help to monetize gas discoveries in those blocks.
The new affiliates would be able to bid for gas that is being produced in those areas. ONGC group companies had been using imported LNG as fuel. They would now be able to price discovery auction, as said the chairman and managing director of the firm. This would, in turn, create competition and would help to create better pricing for ONGC. Shanker also thinks that this would save a lot of costs as the group companies would be replacing imported fuel with domestically produced gas.
Rates, through the current formula, are revised every six months. Prices are set on April 1 and October 1 of each year. Prices set on October 1 of this year are to $ 1.79 per mmBtu. This is the lowest pricing that the company has got since 2010 when the government had taken steps towards deregulating gas pricing. In May 2010, the cabinet had taken the decision to raise the gas prices that are being sold to power and fertilizer firms from $1.79 per MMBtu to $4.20 per mmBtu.