India expected to cut natural gas price by 14%

New Delhi

INDIA will probably reduce the price of natural gas next month by about 14 per cent, dealing a potential blow to explorers Reliance Industries Ltd and Oil & Natural Gas Corp (ONGC).

The government-set price will track a global decline and fall to less than US$4 per million British thermal units (mmBtu) for October till March from US$4.66, the average of 12 industry estimates in a Bloomberg News survey shows. India reviews the cost half-yearly, using a formula capturing international trends.

A reduction could squeeze profits and curb the scope for gas investment at state-run ONGC and billionaire Mukesh Ambani's Reliance Industries even as India struggles to stem a drop in output. Power producers and fertiliser makers stand to benefit from a price cut, as does the government's budget balance since India subsidises fertiliser to keep it affordable for farmers.

"Globally, gas prices have slumped, which means there will be a sharp drop in Indian prices," said Deepak Mahurkar, leader for the oil and gas team at PricewaterhouseCoopers in India. That is not a good backdrop for the health of the industry or spurring exploration, he said.

ONGC shares gained as much as 1.6 per cent to 228.75 rupees and traded at 227 rupees as at 9.28 am in Mumbai. Reliance Industries rose as much as one per cent to 858.05 rupees and traded at 857.10 rupees. The benchmark S&P BSE Sensex climbed 0.6 per cent.

India's gas-price formula is based on US, Canadian, UK and Russian rates. A shale production boom in the US, a slide in Russia's rouble and a tumble in crude oil, a common index for gas rates, have depressed prices. Natural gas futures on the New York Mercantile Exchange have dropped about 31 per cent in the past year.

India's gas price based on the gross heat value may fall to US$3.80-3.90 per mmBtu, according to Nitin Zamre, managing director of Indian operations at ICF International Inc, a consulting firm in Fairfax, Virginia.

BP plc, Royal Dutch Shell plc and BHP Billiton Ltd are among companies that have written off or delayed billions of dollars of investment in the gas sector around the world. In India, ONGC and Reliance produce almost all of the fuel extracted locally.

While prices today may be low, ONGC is taking investment decisions for the long term, New Delhi-based chairman Dinesh Kumar Sarraf said in an interview. "It's only spot prices that are falling, and we produce for many, many years," he said.

In October last year, Mr Sarraf estimated that each US$1 increase in the price of gas boosts ONGC's annual profit by 23.5 billion rupees (S$502.7 million).

India's natural gas production fell to 33.7 billion cubic metres in the 12 months till March 31, a four-year low, according to the Oil Ministry. Output from Reliance's KG-D6 block in the Bay of Bengal fell 13 per cent to 37 billion cubic feet in April to June from a year ago.

Reliance, owner of the world's biggest refining complex, has argued that India needs higher prices to stimulate exploration and output growth. Geological conditions have hampered KG-D6 production, according to the company.

"A lot of these players are not as enthusiastic today as they were earlier," ICF's Mr Zamre said. BLOOMBERG