NEW DELHI: Ratings agency India Ratings and Research has said that recent domestic gas price reduction on account of a substantial fall in the benchmark indices would significantly increase losses for upstream companies, while improving the profitability of end-user industries.
In industry parlance, upstream companies deal primarily in exploration of resources. According to the ratings agency, end-user industries, specifically city gas distribution (CGD), fertilisers and power are expected to benefit out of this move.
However, a new gas pricing framework could benefit the upstream companies while the other sectors may face a low-to-medium negative impact, cited the agency.
Recently, domestic gas prices were reduced to USD 1.79 per mmbtu for 2HFY21 from USD 2.39 per mmbtu for 1HFY21 on account of a substantial fall in the benchmark indices during 1QFY21. "The proposal outlines the Japan Korea mark-up (JKM) index to act as a floor while calculating domestic gas pricing," the agency said.
"Currently, the domestic gas prices are linked to low-priced international benchmarks such as the US, Canada, Russia and the UK, are reset bi-annually and follow these indices with a one quarter lag. Given that India is a net importer of gas, the domestic prices would more closely follow the spot LNG prices under the proposed regime, indicating parity in pricing for the major importing nations -- Japan, Korea, China and India."
On the other hand, it said the indices used in the current framework reflect prices of major exporting nations which have abundant gas reserves and thereby a lower cost of production than India's, keeping the profitability of gas producers in the country low.