The Indian government on Monday allowed Oil and Natural Gas Corp. to charge a 20% premium over the administrative price mechanism for domestically produced gas from new wells and new interventions at nomination fields.
According to Citi, this new gas pricing regime would apply to 10% of the oil producer's current gas production, and Jefferies expects it to help the company's net profits over the next two years.
Applicability Of New Pricing
The new gas pricing regime applies to 10% of ONGC's current gas production and will apply to 20–25% of the company's production in two to three years, according to Citi.
The premium pricing will apply to 14%, 21%, and 28% of ONGC's total volumes in fiscal 2025, 2026, and 2027, respectively, said Jefferies.
Impact On Financials
Jefferies has increased its net profit estimates for ONGC in fiscal 2026 and 2027 by 2% and 3%, respectively, in response to the anticipated volume impact. The brokerage also raised its earnings per share estimates for the same periods by 2-3%.
According to Citi, the new pricing regime could cause ONGC's blended gas price realizations to rise from $6.5 per million metric British thermal unit in fiscal 2024 to $7.5 per million metric British thermal unit in fiscal 2027.
Gas Pricing In India
India's oil and gas sector uses the Administered Price Mechanism, or APM, a government-controlled pricing system, to set the price of petroleum products. The APM price for natural gas is linked to the Indian crude basket price and is revised monthly.
Before the 20% premium was introduced, gas produced from new wells in ONGC's nomination fields was priced at the same rate as gas from existing wells: $6.5 per million metric British thermal unit. This capped the company's realizations about produced gas.
Nomination fields are oil and gas exploration and production blocks awarded to state-owned companies, primarily ONGC and Oil India, without competitive bidding before 1999.
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