The oil ministry proposal of new price only for incremental gas is a practical one to resolve the complex and long pending price issue, says Nomura
The petroleum ministry has proposed that a higher gas price as per the Rangarajan formula be allowed only for incremental production over and above average FY14 production, says a report from Financial Express. The proposal is negative in near term for producers, but a practical one to resolve the complex and long pending price issue, says Nomura in a research note.
"While it is just a proposal, and will need to be debated and approved by the Cabinet Committee of Economic Affairs (CCEA), to us it seems like an interesting idea to resolve the vexed gas price issue," the report says.
Nomura says, it (the proposal) will resolve the twin problems of giving a good price to encourage new investments, and at the same time no sharp cost increase for current gas users of gas particularly power, fertiliser and city gas.
"While operational modalities can be complex, we think these can be resolved. For example, in existing producing fields production will typically decline, and even to sustain current production, companies need to incur cost. If companies are not given a suitable higher price for sustaining
production, all the focus may shift to bringing new production online, at the cost of not sustaining current production," it added.
A bulk of the current production is from the nominated blocks of ONGC and Oil India. Nomura says, "If price hikes are not made applicable on the existing production, there may not be much protest from ONGC and Oil India, we think. We have held a view that, after the 100%-plus increase in June 2010, there was not much rationale for increasing administered pricing mechanism (APM) gas prices."
"For KG-D6, the existing pricing formula $4.2/mmbtu has already expired on 31 March 2014 and new pricing is due from 1st April. However, as the contractors, RIL, BP and Niko have already initiated the arbitration on gas pricing, government can decide not to give price hike
now pending result of arbitration," Nomura said.
Nomura expects the new proposal is likely to be negative for current producers, especially ONGC and OIL. It said, "While denial of higher gas price for existing production in KG-D6 would be negative for RIL, we think that the company can get the benefits retrospectively if it wins the arbitration proceedings initiated on gas pricing. We think that RIL has a strong case in the arbitration given that current pricing for the KG-D6 was valid only till March 2014 and production sharing contract (PSC) provides for market determined pricing."
According to the research note, the proposal would be positive for mid or downstream companies, while in the gas space GAIL, Indraprastha Gas and Gujarat Gas would emerge as beneficiaries. "No sharp increase in gas price for current domestic gas will be a key positive for GAIL in particular,as GAIL is using gas for internal consumption for LPG/ Petchem production as well as internal consumption of pipelines. In our numbers, we are assuming a domestic gas price increase to $8.5/mmbtu from 1 July 2014. City gas companies such as IGL and Gujarat Gas, would not need to increase the retail prices for CNG and domestic piped gas. This would provide these fuels with competitive advantage v/s other liquid fuels, and will likely spur volume growth," Nomura added.
Railways on Friday decided to hike passenger fares by 14.2% and freight rates by 6.5% from 25th June
Faced with an acute cash crunch, the Indian Railways on Friday decided to hike passenger fares by 14.2% and freight rates by 6.5% from 25th June. Currently, Railways is facing severe financial crunch with passenger subsidy touching Rs26,000 crore.
"The Railway passenger fare and freight rate revision was done as part of interim budget presented by the previous government. But the implementation of revised rates was withdrawn by previous regime because of the elections. Meeting the annual expenditure would not be possible unless the revised rates as finalized by previous government is implemented, hence order of withdrawing implementation of revised fare and freight has been withdrawn. Accordingly, the revised passenger fare and freight rates and freight structure rationalization will come into effect from 25 June 2014," the Ministry of Railways said in a release.
Second Class monthly season ticket (MST) fares of suburban and non-suburban shall be charged on the basis of 30 single journeys instead of approximately 15 single journeys. Fares of First Class monthly season tickets will be charged at four times the Second Class MST fares as is done presently. Revised fare are also applicable as per the existing method of computation on quarterly season tickets (QST), half yearly season tickets (HST) and yearly season tickets (YST), the Ministry said in the release.
Earlier in March, Mallikarjun Kharge, while presenting the interim rail budget had factored in an across the board 10% hike in passenger fares besides an additional 4.5% raise as fuel adjustment component (FAC) and an increase of freight charges of 6.5%.
On 16th May, the Railways had announced a hike in both, passenger fares and freight rates, by 14.2% and 6.5% respectively from 20th May. However, the hike notification was put on hold later in the day leaving the decision to the next Railway Minister.
Railways was aiming to garner Rs8,000 crore through the increase in passenger and freight charges last month.
According to Nomura, the fare hikes will add slightly to inflation in the near term. "The rise in passenger fares will add around 10 basis points to CPI inflation, while there will be a limited indirect impact on the CPI from the freight hike. WPI inflation is likely to see a marginally larger impact (the railway accounts for around 35% of freight traffic in India) as the cost of transporting goods such as coal, cement, oil, steel and food grains will rise. However, the hikes will improve the profitability of the railways and hence they are a move in the right direction," it said in a note.