Government to take Rs 800 crore hit after gas price cut

The government will be hit by Rs 800-crore revenue loss following the cut in natural gas prices by a steep 18 per cent to $3.82 per unit on Wednesday, the biggest reduction in rates ever.

The decision will hit profits of producers like ONGC. "Natural gas prices, as per the formula approved by the government in October last year, will fall to $3.82 per million British thermal unit (mmBtu) on gross calorific value (GCV) basis for six months, beginning October 1, from the current $4.66 per mmBtu," according to the oil ministry.

On net calorific value (NCV) basis, the new gas price for October 1 to March 31, 2016, would be $4.24 per mmBtu as compared to $5.18 currently.

The reduction will hit producers like state-owned ONGC as well as the Central government, whose earnings from royalty and income tax will dip by about Rs 800 crore during the remainder of the fiscal, according to industry estimates.

State government earnings from VAT on gas sales will also fall by over Rs 250 crore.

"For ONGC, the move will results in a hit of Rs 1,059 crore on its net profit," its director (finance) AK Srinivasan said.

The reduction in price is also likely to dent revenues of private gas producers, but for Reliance Industries (RIL) it would not make much of a difference as its earnings from eastern offshore KG-D6 gas field has been capped at 2014 price of $4.20 with incremental rate going towards meeting deficit created because of output lagging targets.

While the cut will impact the revenue of producers like Oil and Natural Gas (ONGC) and Reliance Industries, it will bring gains for users in the power and fertiliser sector in the form of lower feedstock cost.