According to analysts, the domestic gas price mechanism disclosed by the government last week will be favorable to offshore corporations such as Oil and Natural Gas Corporation Ltd (ONGC) and Oil India Ltd (OIL) The new system, known as the administered price mechanism (APM), represents the adoption of some of the important recommendations made by the Kirit Parikh Panel, which is scheduled to rule on petrol price liberalization in India. Domestic petrol prices will be linked to foreign crude oil costs and will be 10% of the Indian crude baskets. It will be updated once a month.
The newly implemented petrol price mechanism's formula will contain a $4 and $6.5 floor and maximum. The cap will remain in place for the next 2 years.
"The new mechanism is beneficial to ONGC/OIL because the floor price is higher than their cost of manufacturing, as compared to selling petrol at a much lower realization than the production cost for a long time in the previous regime," Motilal Oswal Financial Services said in a report.
According to experts, the new petrol pricing system is a huge benefit to producers since it cuts a multi-decade overhanging on future profits. Analysts believe that allowing for a 20% premium over the APM price for gas produced from new wells or manipulations in existing ones is going to encourage ONGC and OIL to make extra expenditures to improve production from old legacy assets.
Over the past five years, ONGC and OIL had asked the government for a floor price as they were selling petrol at a loss when prices was still below the cost of manufacturing. The older system based on these gas hubs, according to the government, had significant time lag and high volatility, so "the need for this rationalization and change was felt." During the last 3 years, the stock of ONGC has risen by approximately 100%. But it fell approximately 10 percent in the last year.
