In a move that did not entirely come as a surprise, India's Election Commission earlier this week asked the incumbent government to defer a hike in the wellhead price of natural gas that was due to be implemented on April 1.
But analysts are confident that implementation of the new gas pricing mechanism -- recommended by a government-appointed panel of experts, ratified twice by India's Cabinet and notified by the government in January -- is inevitable.
This should provide some relief to upstream producers Oil and Natural Gas Corp., Oil India Ltd. and Reliance Industries Ltd., which are relying on a price hike to boost their earnings and monetise reserves considered uneconomical to develop at the current regulated price of $4.20/MMBtu.
ONGC and OIL's production has remained stagnant at 70 million cu m/day and India's overall gas production has fallen from 143.1 million cu m/d in 2010-2011 to 111.4 million cu m/day in 2012-2013.
In a move that did not entirely come as a surprise, India's Election Commission earlier this week asked the incumbent government to defer a hike in the wellhead price of natural gas that was due to be implemented on April 1.
But analysts are confident that implementation of the new gas pricing mechanism -- recommended by a government-appointed panel of experts, ratified twice by India's Cabinet and notified by the government in January -- is inevitable.
This should provide some relief to upstream producers Oil and Natural Gas Corp., Oil India Ltd. and Reliance Industries Ltd., which are relying on a price hike to boost their earnings and monetise reserves considered uneconomical to develop at the current regulated price of $4.20/MMBtu.
ONGC and OIL's production has remained stagnant at 70 million cu m/day and India's overall gas production has fallen from 143.1 million cu m/d in 2010-2011 to 111.4 million cu m/day in 2012-2013.
In a move that did not entirely come as a surprise, India's Election Commission earlier this week asked the incumbent government to defer a hike in the wellhead price of natural gas that was due to be implemented on April 1.
But analysts are confident that implementation of the new gas pricing mechanism -- recommended by a government-appointed panel of experts, ratified twice by India's Cabinet and notified by the government in January -- is inevitable.
This should provide some relief to upstream producers Oil and Natural Gas Corp., Oil India Ltd. and Reliance Industries Ltd., which are relying on a price hike to boost their earnings and monetise reserves considered uneconomical to develop at the current regulated price of $4.20/MMBtu.
ONGC and OIL's production has remained stagnant at 70 million cu m/day and India's overall gas production has fallen from 143.1 million cu m/d in 2010-2011 to 111.4 million cu m/day in 2012-2013.
Under the new pricing formula, which takes into account the netback price of Indian LNG imports and the international price of gas, the Indian wellhead price was to go up to over $8.00/MMBtu.
"We have been anticipating that the April gas price hike may become a victim of political rhetoric," Nomura said in a note released Wednesday.
India's general elections are scheduled to be held over April 7-May 12 and the government has been facing flak from opposition political parties for the price hike, which they allege was implemented illegally and will be a curse on the economy.
Indian Oil Minister M. Veerappa Moily is facing charges of corruption related to the price hike and some in the opposition have filed petitions with the Supreme Court challenging it.
Nomura said in its report that although the government had notified the gas price hike, "given the recent political rhetoric on the issue, it was on the back foot."
In a report issued last month, the bank had said there was an increasing risk that the government would shy away from implementing the price hike.
"The need, rationale and process to arrive at new prices are easy to justify (and the oil minister has justified this). But a sharp rise in retail gas prices may not be easy to justify and could be politically suicidal just weeks ahead of elections, in our view," it said in a note issued February 26.
Nomura said this week that the EC has only ordered a "deferral" of the notification of the gas price applicable from April 1 for the first quarter of fiscal year 2014-15.
"The gas price notification can still be very well applied by the new government [post elections] as early as possible. But till the time the decision is taken, concerns and overhang on the issue will stay," the bank said. The results of India's general elections are due May 16, after which a new government will come to power.
NO WORD YET FROM MINISTRY
The Election Commission issued its notice of deferral on Monday, writing to Oil Secretary Saurabh Chandra that as the matter is before the Supreme Court, a decision on the gas price increase may be deferred.
But the petroleum ministry is yet to make a formal announcement that the deferral will be implemented.
"We expect the incumbent [government] to abide by this [the Election Commission's] decision, implying that the onus of implementing the decision will fall on the new government," Barclays said in a report Tuesday.
But the bank added: "While disappointing, we note that this only defers the eventual outcome unless the new government scraps the Cabinet decision (ratified twice) to raise prices ... This is unlikely, in our view ...."
Another analyst, Deven Choksey, of KR Choksey Securities, said he too believed the gas price hike was inevitable.
"The new government that comes into power will have to consider it with a very fair viewpoint because it is a part of an agreement which was signed earlier. The ministry and government had already implemented it," he said in an interview with the ETNow.
IMPACT ON PRODUCERS
"Assuming the new government does not scrap the decision altogether -- unlikely, in our view -- this could defer upside for gas producers by one quarter, cutting estimated gas realizations for 2014-15 by $0.90/MMBtu or 10.5%," Barclays said in its report.
The bank added that what the deferral does is allow the government more time to address affordability issues for the power sector.
"The deferment is certainly negative for the entire sector, and adds to confusion. However, if the deferment is only for a quarter, the impact will likely be higher for ONGC and OIL, in our view," Nomura said.
According to Nomura, for each $1/MMBtu gas price increase, ONGC's earnings are impacted by 7-8%. "Assuming that a $4/MMBtu hike is deferred by a quarter, their likely impact would be 7-8% of fiscal year 2014-15 (April-March) earnings," Nomura said.
OIL's 2014-15 earnings would be impacted by 8-9%, the bank added. Both Barclays and Nomura do not see the deferred price hike as having a big impact on Reliance.
"Given the fall in KG-D6 gas output over time, the impact on Reliance from lower gas prices is less significant," Barclays said.
According to Nomura, a deferral of the price hike by one quarter will be a modest 1.7% of Reliance's 2014-15 earnings.
