Markets Overenthusiastic About Uniform Gas Price Rise?

In the month of June 2013, the Union Cabinet had approved with much fanfare, a much-awaited and much-hyped uniform gas price rise by almost 100 per cent from the current level of USD 4.2. Soon after that, however, this decision met with many roadblocks, with different ministries expressing reservations over the decision.

Nearly six months later, the decision is in the news again. It is now being reported that there will soon be fresh notification of the Cabinet decision, albeit with some changes, and that it will be implemented as per its scheduled timeframe of April 2014 onwards.

The impact of this latest report has been quite positive despite the fact that this decision has already been discounted by the markets. Both RIL and ONGC witnessed a sharp appreciation on the bourses this morning, with a spurt of around 2.5 per cent (the stocks were up by around Rs 20 and Rs 8 respectively).

However, if sources are to be believed, the enthusiasm around gas pricing and its benefits to the companies seems to be overdone. Sources told DSIJ that even if this uniform price is accepted, PSU gas producers like ONGC and OIL may be asked to supply gas at subsidised rate to some producers, particularly to those in the fertilisers sector. At around USD 8.2 per unit, the current price is not feasible for the sector.

A highly placed official at the Ministry said that the new pricing will be implemented in April 2014. Considering that the elections are also due around March, the new government will certainly have a bearing on this crucial decision. It also stands a chance of being reversed by the next government, as there is a lot of fuss around the pricing of natural resources like gas for important sectors like power and fertilizer. This is one of the reasons that the oil manufacturers’ lobby is working night and day to implement and notify this decision at the earliest.

Over the past 5 months, this news has been used by market participants and speculators as per their convenience to pull upstream companies stocks. In this period, RIL’s stock spurted at least 4 times based on this news. However, it may not exactly be a cakewalk for the company to double its prices –  in fact, it would be the other way around.

The Finance Ministry is strongly against giving RIL an easy run, and is of the view that the past year’s shortfall from the company’s KG block should be compensated at the old price. Talks are also on in the government about providing security for this kind of situation. There is a new Cabinet note being prepared for the same, which asks for the producers (RIL, in particular) to provide bank guarantee as a security for any kind of shortfall and deliberate attempt of hording of gas. This condition is a concern for RIL. With a change in power at the centre, the situation can change drastically.

The Parliamentary Standing Committee has recently construed that any non-adherence to the approved field development plan of the KG-D6 block is a clear case of default and that the ministry should take every step to increase the gas output. Considering this situation and in view of the upcoming Parliamentary elections, it is too early to believe that the benefit of higher prices will be accrued by gas producers, be it RIL or ONGC/OIL.