Govt refuels hope of reforms with gas price hike - Economic Times

By Vinay Khattar MUMBAI: The Indian markets received positive news on the policy front. The CCEA approved an increase in gas prices from US$4.2/mmbtu now to US$8.4/mmbtu, based on the mechanism suggested by the Rangarajan Committee. The price will be calculated by taking a weighted average of netback prices of LNG imports into India and benchmark global gas prices. Under the new pricing formula, the gas prices will be revised every quarter using data for the trailing 12 months. The new gas price mechanism shall be effective from April 1, 2014 and is valid for five years. The government says that these guidelines will not only help incentivise investment in the Indian upstream sector, but will also ensure that producers do not cartelize because of the huge unmet demand. The Rangarajan Committee has proposed to link the prices for domestic natural gas to international prices, to give incentive for local production besides attracting incremental investments into the crucial energy sector. Over the longer term, this would result in higher domestic production, which in turn would reduce dependence on oil & gas imports. These guidelines will be applicable to all domestically produced gas. However, they will not be applicable in respect of gas for which prices have been fixed contractually for a certain period of time, till the end of such period. The PMT gas price is unlikely to be revised since it is contractually fixed for the next 3-4 years at US$5.7/mmbtu. These guidelines will also not be applicable where the contract provides a specific formula for natural gas price indexation/fixation. The government's move is seen to be positive for RIL as it will improve the company's profitability. Deep water upstream oil & gas resources like that of RIL will also become more viable now. Still, the positive impact on RIL's earnings could be limited given the challenges on improving production from the KG-D6 block. On the other hand, the steep hike in gas price could cap earnings for ONGC and Oil India if the government decides to hike royalty rates (10 per cent at present) on natural gas produced from nominated fields, besides also increasing the subsidy burden for the upstream companies. The impact could be neutral for GAIL if there is a reduction in its subsidy sharing burden. City gas distributors (CGDs) such as Indraprastha Gas and Gujarat Gas may need to hike prices substantially (25-30 per cent) to offset the steep increase in their input cost. From a broader market point of view, the move is encouraging as it shows that the government is prepared to take tough economic initiatives to lift the glum mood. The proposed gas price hike, along with the policy decisions taken in the preceding months, is aimed at addressing macro-economic strains. The Centre is also taking steps to improve the elevated current account deficit (CAD) by discouraging gold imports. According to UPA-II's economic managers, more positive measures are on the anvil in the coming weeks, as it seeks to shore up the domestic economy ahead of the Lok Sabha elections. FII inflows, which turned negative in June, would likely improve if the government builds on the feel-good generated by the proposed gas price hike. A good start to the southwest monsoon (barring the Uttarakhand tragedy), coupled with a steadily improving global economic backdrop, will only add to the positive undercurrent. (The analyst is Head of Research (Individual Clients), Edelweiss Financial Services) Copyright © 2013 Times Internet Limited. All rights reserved. via Business - Google News http://news.google.com/news/url?sa=t&fd=R&usg=AFQjCNHlj0-NhRXgFCgPsVkzTJy9sZ04Cg&url=http://economictimes.indiatimes.com/markets/analysis/govt-refuels-hope-of-reforms-with-gas-price-hike/articleshow/20831048.cms

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