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Will gas price hike be a game changer?
Fri, 29 Nov Pre-Open

The state owned companies in the energy sector in India have been one of the worst victims of Government's populist measures like controlled fuel prices and subsidies. The latter has burdened the economy with a huge fiscal deficit. And that is just a part of the problem. With so much of uncertainty and regulatory interference, the sector has lost its appeal for investors. No one wants to invest in the energy sector in India.

To revive this interest, especially as the fresh round of New Exploration and Licensing policy (NELP) is approaching, the Government has decided to notify the new gas pricing formula within three weeks. However, as an article in Economic Times suggests, it would be naïve to assume that the decision will make much difference to the fortunes of the state owned companies.

This is because the decision to raise gas prices will have a drastic impact on other industries like fertilizers, which use gas as raw material. The gas prices are expected to increase around two fold. This will imply substantial increase in the cost of production of urea. And since the minimum retail price of the urea is determined statutorily, the higher cost of production is likely to borne by the state run gas exploration companies. It is important to note here that the companies in the upstream segment still share subsidy burden on an ad hoc basis. Hence, we will not be surprised if the Government raises the contribution of state run gas companies to compensate for the high cost of production incurred by priority sectors once gas price hike comes into effect.

Afterall, something similar has already happened in the past. Earlier, an increase in the gas prices from US$ 2 per million British Thermal units (mmBtu) to US$ 4.2 per mmbtu did not bring much relief to the state owned producers like Oil and Natural Gas Corporation Ltd (ONGC). This is because the hike was coupled with an increase in the state owned producers' subsidy share. Now that the Government finances are in much worse shape, it is quite likely that the state owned companies will end up sharing most of the incremental burden. To conclude, while the decision to increase gas prices sounds good, it is unlikely to be a game changer for state owned companies.

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