India's ONGC Pushes for Higher Gas Prices to Counter Revenue Loss of $632 Million

---

Researched by Industrial Info Resources (Sugar Land, Texas)--R. S. Sharma, Chairman and Managing Director of Oil and Natural Gas Corporation Limited (BSE:500312) (ONGC) (Dehradun, Uttarakhand), India's largest oil and gas producing company, recently said that the company may have incurred a revenue loss of $632 million during the 2008-09 fiscal year because of selling gas at prices fixed by the government. Power and fertilizer companies have been regularly purchasing gas from ONGC at rates far below prevailing market prices. The government has fixed low rates in an effort to protect the poor- and the middle-class population, and also to keep a check on inflation.

Under the government's licensing policy of 1999, Reliance Industries Limited (BSE:500325) (RIL) (Mumbai), which was awarded a block in the Krishna Godavari basin off the east coast of India, can sell its gas at a wellhead price of $4.20 per million British thermal units (BTU). This is much higher than the price ONGC earns for gas from blocks in the same fields, which were awarded to ONGC before the licensing policy came into effect. Sharma said that the government has not yet implemented the gas-price increase that was approved in 2005.

ONGC suffered a revenue loss of more than $447 million in the 2007-08 fiscal year for similar reasons. ONGC produced 22.33 billion cubic meters of gas that year, including gas produced by the company's joint ventures, which are beyond the government's control. ONGC has been trying hard to have gas prices increased in order to have pricing similar to private companies. Since March 2009, ONGC has been demanding a price hike from the existing $2.10 per million BTU to $4 per million BTU. A company official said that a minimum price of $4 per million BTU was necessary for the company to sustain investments in future.

According to Sharma, ONGC is likely to borrow more than $5.6 billion during the next three to four years in order to finance a variety of projects that would be undertaken by the firm's subsidiaries in the refining, petrochemical and power sectors. ONGC is also likely to borrow more than $1 billion to redeem the commercial paper issued by the firm to raise funds required to purchase Imperial Energy Corporation plc (London, United Kingdom). Imperial Energy was acquired by ONGC's subsidiary and overseas wing, ONGC Videsh Limited (New Delhi).

In late May, India's Oil Minister Murli Deora said that the central government was considering the possibility of deregulating the prices of diesel and gasoline over the succeeding six to eight weeks in order to help state-run refiners decrease their losses on fuel products sold at rates fixed by the government. However, the ministry has maintained that the time is still not suitable to bring about a price increase for cooking gas and kerosene. The ministry has also been pointing out the huge scarcity of gas in the country.

If the proposal were to be approved, oil-marketing companies would have the liberty of increasing or decreasing pump prices every fortnight or every month in accordance with the fluctuation of international crude-oil prices. However, if the price of crude reaches $75 per barrel, the companies would have to once again maintain the subsidized prices dictated by the government. In spite of the increasing crude-oil prices last year, Indian consumers were cushioned from the sharp hikes by the government's subsidized rates. However, this resulted in several private retailers having to close their networks, as they could not compete with the low prices offered by state-owned retailers. State firms were offered IOUs by the central government. Although this helped them maintain good bottom lines, they were forced to borrow money at high interest rates in order to meet operational costs.

This is not the first time that the oil ministry has drawn up such a free-market proposal, but each time the industry and bureaucracy have pushed for approval of the proposal, they have had to face strong political opposition.

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy related markets. For more than 26 years, Industrial Info has provided plant and project opportunity databases, market forecasts, high resolution maps, and daily industry news.