The steep cut of 18 per cent this past Wednesday brought down natural gas prices to a staggering $3.82 per unit. This is the biggest ever reduction in rates so far.
While we will see the consequences of the cut in the next few days, this reduction will make a huge dent of about Rs.800 crore in the government revenues and hit profits of producers like that of Oil and Natural Gas Corporation (ONGC).
As per the formula approved by the government in October last year, the natural gas prices will fall to $3.82 per million British thermal unit (mmBtu) on gross calorific value (GCV) basis for six months beginning today October 1, from the current $4.66 per mmBtu, according to the Oil Ministry.
On net calorific value (NCV) basis, the new price that will be implemented till March 31, 2016 would be $4.24 per mmBtu as compared to $5.18.
Calorific value is the energy released during combustion of fuel such as gas. More the value, more the efficiency of fuel. Gross calorific value is the actual energy released. Net value excludes the energy used for ancillary activities. This huge reduction will hit oil producers hard and would especially have a huge impact on state-owned producers’ earnings, thereby that of the central government.
The central government earns from royalty and income tax which will now dip by about Rs.800 crore in the next 6 months, according to industry estimates. The earnings of state governments too will also be greatly affected because VAT on gas sales will now fall by over Rs.250 crore.
The steep cut will impact ONGC the most as the move will result in a hit of nearly Rs.1,059 crore on its net profit according to its Director (Finance) A.K. Srinivasan. However, the price cut will benefit power and fertiliser producers apart from the government, which subsidises fertiliser to keep it affordable to farmers.