The stakes in the Ambani gas dispute are high for both parties and the outcome uncertain. If the lower price prevails RIL stands to lose over $14 billion in revenue (over a 15 year period) and the government valuable taxation revenue. Moreover, it will set lower expectations in the minds of other consumers on future gas prices and continue to dissuade international E&P majors from participating in India's gas boom.
According to the Bernstein Research report, the gas price dispute has certainly weighed on RIL which has underperformed the Sensex over the past three months, while Anil Ambani has conducted a very public campaign on this issue. The next milestone in the saga will be the Apex court hearing which is scheduled to begin on October 20.
Investors should watch developments closely over the coming month as a negative outcome has the potential to be damaging to RIL (although given RNRL has yet to build its power plants - the effects will not be seen until 2013). The report says, “We believe that a higher gas price outcome will prevail given the importance to India's emerging gas industry.
In five years' time, we believe $4.20 per million British thermal unit (mmbtu) will be cheap. Although RNRL are right to seek the best price possible, we believe they should lock in as much natural gas at this price as they can and focus on developing their gas fired power business which is where the long term value lies.” If the lower gas price of $2.34 per mmbtu is approved and applied to all gas produced from Dhirubhai, the report estimates the full cycle IRR would be less than 3.3% which is below the cost of capital. In other words, the lower gas price calls into question the whole viability of the development of deepwater gas in India because of the precedent it sets. If Dhirubhai cannot be developed economically, what chance do the other smaller discoveries have of making progress?
The report notes, although the legal arguments are complex, our view on this issue is simple.India cannot afford to let the lower gas price prevail, if it is serious about developing its natural gas industry. India needs natural gas.
At present, natural gas represents only a fraction of the energy mix in India at around 5% of total energy consumed. This is low by international standards. Natural gas in developed countries typically occupies 20% to 30% of the energy mix. The low penetration of gas in the energy mix is partly a function of the low levels of GDP per capita (which is highly correlated with gas consumption) but also due to a shortage of domestic gas supply.
Moreover, today, India has among the lowest prices of natural gas in Asia. This may suit consumers who are fortunate enough to have supply, but does not reflect the scarcity of natural gas resources. Rather than helping, low gas prices are hindering the development of a natural gas industry in India.
ONGC provides gas for a price of $2 per mmbtu under the adjusted pricing mechanism (APM) which is hardly an incentive to go exploring for gas. Lessons from other countries which follow or encourage low natural gas pricing policies are not encouraging.
The only regions with lower gas prices than India are Russia and the Middle East where domestic gas prices are between $1-$2 per mmbtu. Unlike India, these countries also have abundant gas reserves. What is clear, however, is that in both countries the policy of low gas prices has had a negative impact on the development of natural gas....
Source: financialexpress.com
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