Domestic Gas Prices Raised 62% and What it Means for Stocks

In an unprecedented hike, the Union government increased the price of natural gas by 62% from $1.79 per MMBtu to $2.90 per MMBtu (million British Thermal Units). This is the sharpest hike in natural gas prices in a subsequent 6 month period. Indian government sets the natural prices twice a year applicable for the next 6. This price of $2.90 per MMBtu will be applicable for the 6-month period from Oct-21 to Mar-22, the second half of FY22.

This above pricing refers to the regular gas that is extracted from wells. However, the government has a separate gas pricing formula for gas that is extracted from difficult to extract points like deep-water drilled gas, ultra-deep-water drilled gas etc.

The price for such difficult to extract natural gas has also been hiked by 69% from $3.62 per MMBtu to $6.13 per MMBtu effective for the next 6 months till Mar-22. This premium price is to encourage drilling in difficult fields.

The domestic gas pricing formula is based on the global natural gas prices, which has been up sharply. Globally, gas price is impacted by demand for gas, supply of gas as well as the price of crude oil, which is now above $80/bbl in the crude market. Indian natural gas is priced linked to the weighted average of the natural gas prices of four benchmark prices viz. the US, the UK, Russia and Canada.

What will be the impact?

It is going to impact the extractors and the users differently. Among the major  gas extractors like ONGC, RIL and Vedanta, the impact will be positive as they realize a better price for the natural gas drilled. However, most of the gas producers have been demanding a price of around $3.50-3.60 per MMBtu for normal gas and over $7.50 for difficult drilled gas to be remunerative.

This spike in gas prices will negatively impact the largest consumes of gas; the city gas distributors. CGD players like Adani Gas, Indraprastha Gas and Mahanagar Gas will be impacted to the extent they cannot pass on the higher costs to the end consumers. Also, fertilizer companies relying on gas-fired plants will see an impact.