Natural gas production in India remains loss-making, say ratings agencies after price cut

• Moody's Investors Service said that the reduction in gas price is credit negative for upstream companies

• We estimate ONGC's revenues and EBITDA to decline by Rs 1,500-1,600 crore on account of lower gas prices, Moody's said

New Delhi: With the Centre slashing the price of domestic natural gas by a steep 25 percent, rating agencies declared that natural gas production in India remains a loss-making proposition for most fields. Moody's Investors Service said on Thursday that the reduction in gas price to USD 1.79 per metric million British thermal unit (mmBtu) from USD 2.39 is credit negative for upstream companies such as Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) as it will lower their revenue from gas sales.

Both these companies are already grappling with low oil prices and a further reduction in natural gas prices will exacerbate their earnings decline, Moody's said and added that gas sales account for around 18-19 percent of the companies' upstream revenues.

Moody's expects decline in revenues, EBITDA of ONGC, OIL

"We estimate ONGC's revenues and EBITDA to decline by Rs 1,500-1,600 crore on account of lower gas prices," Moody's said. "ONGC's credit metrics have sufficient capacity to withstand the decline in gas prices and remain supportive of its baa3 baseline credit assessment (BCA) and Baa3 ratings," it added. 

In comparison, reduction in gas prices will lower OIL's revenue and EBITDA by around Rs 220 crore and the decline is equal to around 2.5 percent of the company's expected consolidated revenue and around 8 percent of consolidated EBITDA for the fiscal year ending March 31, 2021, said Moody's. "We expect OIL's credit metrics to remain weakly positioned relative to baa3 BCA for fiscal 2021, but to improve and come back within its ratings thresholds by fiscal 2022 as oil prices start to recover," it added.

Price cut will dampen development of natural gas projects: ICRA

ICRA said the government has additionally announced a 27.6 percent reduction in the ceiling on the price for gas produced from deep water, ultra deep-water, high temperature and high-pressure fields to $4.06 per mmBtu, which would dampen the development of such projects.

K Ravichandran, senior vice-president and group head (corporate ratings) at ICRA, said, "At such low gas prices, gas production remains loss-making proposition for most fields for the Indian upstream producers notwithstanding some decline in oil field services/equipment costs."

Also read: Govt resets domestic natural gas price to historic low of $.179 per mmBtu

"Going forward, the supply glut is expected to keep prices of domestic gas low in the near-to-medium term leading to poor returns even as domestic gas producers such as ONGC and Reliance Industries-BP ramp up gas production significantly," he said.

"Accordingly, the double whammy of low crude oil and natural gas prices is negative for the upstream sector impacting their revenues, profitability and cash accruals," said Ravichandran.

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