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Natural gas price increase positive for ONGC, Reliance

October 5, 2021 04:15 PM

Natural gas price increase positive for ONGC, Reliance
The price for gas from fields that were assigned by the state to oil companies, mainly Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL).

The 62 per cent increase in natural gas prices by the Indian government will boost the profitability of upstream companies in the country and support their investment spending, Fitch Ratings said on Tuesday.

The price for gas from fields that were assigned by the state to oil companies, mainly Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL), increased to USD 2.90 per million British thermal units (mmBtu) for October 2021-March 2022, from USD 1.79 per mmBtu in the previous six months.

“Higher gas prices will increase the input cost for key end-consumer sectors, to the extent the price hike is passed on,” Fitch said.

Domestically produced gas is supplied on a priority basis to certain sectors, with 30 per cent of it being consumed by power producers, around 27 per cent by the fertiliser sector and 19 per cent by city gas distributors in FY21.

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The gas price increase will hit the fertiliser sector’s profitability by increasing working-capital requirements, Fitch said. The cost of power generated by gas-based power plants will increase, which will further decrease their utilisation.

Auto gas fuel’s price will remain competitive against liquid fuels, albeit with a reduced differential, notwithstanding the gas price increase. This is because liquid auto fuel prices have also been climbing in recent months, given the rise in crude oil prices.

“ONGC’s and OIL’s ratings and standalone credit profiles (SCP) remain unchanged as the price increase was largely in line with Fitch’s expectations, driven by the rise in global prices over July 2020-June 2021,” the rating agency said in a statement.

However, sustained high gas prices will strengthen ONGC’s ‘bbb+’ SCP and will add buffer to OIL’s credit metrics, which will support its capex to expand capacity at subsidiary Numaligarh Refinery Ltd.

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