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18% reduction in gas price credit-negative for ONGC and Oil India

06 Oct 2015 Evaluate

After S&P, another global rating agency Moody’s in its credit outlook has said that the 18% reduction in gas price for the six month period starting October 1 was credit-negative for producers such as Oil and Natural Gas Corporation (ONGC) and Oil India, since it would lower their revenue and cash flow. It added that the sharp cut in natural gas prices notified by the Indian government will not only impact state-run companies but will also discourage new exploration investments and fuel imports.

Moody's said that India relies on natural gas imports to meet its energy needs. Imports accounted for 36% of the total natural gas consumption in India for fiscal 2015 and 39% for the five months between April 1 and August 30, 2015. It added that imports will continue to increase as low international gas prices stimulate demand for natural gas and low domestic prices discourage further investments by upstream players to explore and develop new gas reserves.

The rating agency in its report has said that gas price reduction will have its greatest effect, in absolute terms, on ONGC, and at present sale volumes, it expect ONGC's revenue to decline by about $300 million (approximately Rs 2,000) for the six months between October 1 and March 31. OIL revenues, it said, would decline by about $33 million (approximately Rs 220 crore) for the same period.

India sets natural gas prices by taking a volume-weighted annual average of the rate prevailing in the US, Britain, Canada and Russia. Prices are calculated on the trailing 12 month data with a lag of one quarter. Accordingly, the price came down to $3.82 per mBtu (million British thermal unit) from $4.66 on a gross calorific value basis for the six month period starting October 1. Moody’s has said that with benchmark prices still low, the government-mandated domestic natural gas price is likely to remain muted over the next 12-18 months. It has further stated that its assumption for Henry Hub natural gas prices for 2016 is $3 per mBtu and $3.25 per mBtu for 2017.

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