13 January 2014
Oil & Gas | Update
Oil & Gas
MoPNG notifies gas price hike; Big positive for domestic gas producers
Maintain Buy on ONGC and OINL; Neutral on GAIL and RIL
Event:
The Ministry of Petroleum and Natural Gas
(MoPNG) has finally notified (long awaited) the
Domestic Natural Gas Pricing Guidelines, 2014. The
notified domestic gas pricing methodology is in line
with the Rangarajan Committee’s gas price formula and
implies new gas price at ~USD8.4/mmbtu v/s the current
USD4.2/mmbtu. The formula is applicable from 1 April
2014 (FY15) and will be valid for five years. Further, gas
prices will be revised quarterly. The gas price hike will
be applicable to ONGC/OINL nominated fields, shale
gas and coal bed methane (CBM). For RIL, the hike is
subject to its furnishing a bank guarantee.
Power and Fertilizer sectors. If ONGC/OINL do not
have to bear the subsidy, then our EPS estimates
would further increase by ~15%.
RIL might have to cross one more hurdle:
It seems
RIL would have to cross one more hurdle, as the
Supreme Court is scheduled to hear the case
against the government decision to give gas price
hike to RIL. The case has been filed by CPI MP, Mr
Gurudas Dasgupta and an NGO. The hearing is
scheduled on 4 March 2014.
FY15E earnings sensitivity: ONGC/OINL biggest beneficiaries
of gas price change
Our view
Big positive for domestic gas producers:
The gas
price hike would be earnings accretive for gas
producers like ONGC, OINL and RIL. However, it
would be negative for gas consumers like Power,
Fertilizer and City Gas Distribution (CGD)
companies. The impact on GAIL (consumes gas to
produce LPG and petchem) will depend on the
subsidy respite. Also, prima facie, the hike is
negative for IGL, but historically, it has passed on
the increases in its gas costs.
Prices to be revised quarterly based on formula:
Depending on the underlying gas prices, domestic
gas prices would change quarterly and could vary
between USD8-9/mmbtu in FY15. Price for each
quarter would be the trailing 12-month average
price, with a lag of one quarter (the price for April-
June 2014 would be calculated based on the
average for the 12 months ended December 2013).
Conservatively model gas price of USD6.3/mmbtu,
assuming 50% subsidy to Power and Fertilizer
sector:
There could be an upside to our numbers
for ONGC/OINL. We have conservatively modeled
gas price of just USD6.3/mmbtu (v/s expected
USD8.4/mmbtu) from FY15, assuming that 50% of
incremental price would be given as subsidy to
*Base case highlighted
Valuation and view
We maintain our positive stance on ONGC (Mkt Cap
USD39.2b, CMP INR284, TP INR383, 35% Upside, Buy)
and OINL (Mkt Cap USD4.5b, CMP INR465, TP INR640,
38% Upside, Buy), and are Neutral on GAIL (Mkt
Cap USD7.1b, CMP INR345, TP INR370, 7% Upside,
Neutral) due to near-term headwinds to its
transmission volumes.
Given the low gas volumes, RIL’s earnings have low
sensitivity to gas price increase. RIL (Mkt Cap
USD44.7b, CMP INR858, TP INR957, 12% Upside,
Neutral) would benefit over the longer term, when
its gas volumes increase in FY16; higher gas price is
also likely to result in increase in its reserves.
Harshad Borawake
(HarshadBorawake@MotilalOswal.com); +91 22 3982 5432
Kunal Gupta
(Kunal.Gupta@MotilalOswal.com); +91 22 3982 5445
Investors are advised to refer through disclosures made at the end of the Research Report.

Oil & Gas | Update
Gas pricing formula by Rangarajan Committee
On domestic natural gas pricing, the Rangarajan Committee had noted that though
the PSC provides for arms-length pricing, it is not possible in India to adopt this
route for several more years. It has recommended an unbiased arms-length
pricing, based on international prices.
The gas pricing was proposed to be uniformly applicable to all the sectors and
domestic gas allocation would be as per the government’s gas utilization policy.
Formula proposed by the Committee:
Arms-length price in India = 12-month
average of:
1. Volume-weighted net-back pricing at well-head for gas producers who export
to India, and
2. Volume-weighted price of US’ Henry Hub, UK’s NBP and Japan’s JCC-linked
price. The Committee has not commented on the domestic gas allocation to
the sectors.
Likely underlying assumptions for USD8.4/mmbtu of implied price, based
on Rangarajan Committee formula
(A) Net-back pricing for producers who export to India
In USD/mmbtu
Volume
(mmscmd)
33.2
3.9
14.0
51.0
FOB
Price
11.3
14.0
14.0
Liquifaction
cost
3.0
3.0
3.0
Treatment
Cost
0.5
0.5
0.5
Net-back
Price
Qatar (Long Term)
Qatar (Medium-term/Spot)
Others
Weighted avg. by India imports (A)
7.8
10.5
10.5
8.7
Source: Company; MOSL
(B) Net-back for Japan imports / Market pricing at gas hubs in US and Europe
In USD/mmbtu
Volume
FOB Liquifaction
(mmscmd)
Price
cost
Henry Hub (US)
1,978.5
NBP (Europe)
2,816.1
JCC linked (Japan)
256.4
16.0
3.0
Weighted avg. by consumption (B) 5,050.9
Simple average of above two methodologies (A & B) in USD/mmbtu
Treatment
Net-back
Cost Exchange Price
3.8
10.7
0.5
12.5
8.1
8.4
Source: Company; MOSL
Key assumptions for our calculations
We assume Qatar pricing at March 2014, based on formula
Pricing for others is assumed at USD14/mmbtu and actual can vary depending
on prevalent demand-supply situation
Henry Hub and NBP gas price is modeled at USD3.8/mmbtu and USD10.7/mmbtu,
respectively, based on actual data
Net-back Price = A - B - C
A = Imported LNG Price on Netback FOB available from World Energy Intelligence
B = Liquefaction costs at the respective loading port (source)
C = Transportation
13 January 2014
2

Oil & Gas | Update
ONGC is the largest beneficiary of gas price hike
On the customer front, Fertilizer is impacted the most
Of the incremental revenues, Government earns the most
(INR b)
Central government earns 41% of the incremental revenues
*Calc. for gas price hike from USD4.2 to USD8.4/mmbtu
Source: Company, MOSL
Key Timelines for Gas Pricing in India
Details
Tariff Commission set up to look into Gas Pricing
Issues. ONGC’s producer price increased on ad-hoc
basis Tariff Commission recommendation from
INR2,850 to Rs 3,200 wef 1st July 2005 (from 1st April 06
in NE). ONGC was seeking prices in line with market
related pricing
2006
Initial Report of Tariff Commission - Recommended
price of INR3,450/mscm, Escalation of INR50/MCM for
each 10 point increase in WPI Index, Both MoPNG /
ONGC had reservations on this formula
May-07 Tariff commission revised its pricing recommendation
Revised normative producer price of INR3,600/mscm
Escalation of INR50/mscm for each 10 point increase
in WPI Index
Jun-07 To avoid further delay ONGC conveyed acceptance of
revised price recommendation despite not being in
agreement.ONGC requested 20% annual increase on
price of Rs3600/MCM fixed by TC for FY06, to bring APM
prices in line with market prices. ONGC also asked
for market pricing for additional and new gas above
current APM
Jun-07 CCEA decision for revision of producer pricing based
on TC recommendation
Sep-07 RIL’s KG-D6 gas price fixed at USD4.2/mmbtu
Sep-09 Revised pricing not yet implemented pending
notification
May-10 Govt. revised APM gas price to USD4.2/mmbtu
Dec-12 Rangarajan committee submits its report on Gas
pricing
Mar-14 KG-D6 gas price is slated for change in March 2014
13 January 2014
Date
Jun-05
Prevailing gas prices in India (USD/mmbtu)
14.0
Source: MoPNG
3

Oil & Gas | Update
Higher gas price to boost new investments
The implied gas price of USD8.4/mmbtu would give the necessary impetus for
investments in the domestic E&P sector, in our view.
We believe this would result in fast tracking of the capex by RIL in its satellite
fields in KG-D6 and also development of NEC-25.
Higher gas price could also result in increase in the reserve number, led by increase
in pricing viability.
have been discovered in India. Of these, 42tcf have
A recent study by a global energy consultant, IHS CERA
been developed and are currently under production
on "Yet to be Found" gas in India in the 12 basins with
(~ 18tcf yet to be produced) and 27tcf are yet to be
known reserves has brought out the significant potential
developed.
of domestic gas exploration. While, USD12/mmbtu is an
ideal price to fully exploit the domestic reserve
Besides the yet to be developed 27tcf, a creaming
curve analysis of the 12 major basins shows that a
potential, USD8/mmbtu indicates meaningful upside in
further 64tcf of risked recoverable resources are "Yet
the gas production.
to be Found" through further exploration, taking the
total potential to 91tcf.
Key conclusions on conventional gas resources
Higher gas price in India could bring investments of
Finding and development (F&D) investments and
government revenues increase 4x when domestic
USD412b, gas reserves of 91tcf, and incremental
gas prices increase from USD8/mmbtu to USD12/
revenues of USD298b for the government.
mmbtu.
Over 1950-2012, 69tcf of 2P recoverable gas reserves
USD412b investment likely at gas price of USD12/mmbtu
Government revenues could increase to USD298b
Source: Indianpetro.com, MOSL
Undeveloped + Yet to be Found potential at 91 tcf
Resource / Reserve details
Discovered Gas (1950 to 2012) - A
Produced till 2012 - B
Developed & Yet to be Produced - C
Developed D = (B + C)
Undeveloped E = (A - D)
“Yet to be Found” - F
Total Potential G = (E + F)
Reserve (tcf)
69
24
18
42
27
64
91
India gas potential of 91tcf contingent on gas pricing
Source: Indianpetro.com, MOSL
13 January 2014
4

Oil & Gas | Update
Gas prices vary significantly across regions (USD/mmbtu)
Source: Industry, Rangarajan Committee report, Bloomberg, MOSL
Would watch for subsidy sharing and taxation change
The government move, while clearly positive for gas producers, will impact gas
consumers like GAIL, IGL, and Power and Fertilizer produces, among others.
The impact on GAIL would depend on the subsidy sharing (GAIL management
expects reduction in subsidy, if gas price is increased).
Higher gas cost for Fertilizer companies would increase the subsidy burden for
the government. There remains a possibility of the government partly increasing
the subsidy burden for ONGC/OINL or increase taxes.
IGL likely to pass through gas price hike
Historically, IGL has passed on increases in gas cost to consumers through higher
CNG prices.
Even in June 2010, when the government had hiked gas price from USD2/mmbtu
to USD4.2/mmbtu, IGL had increased the CNG price by INR5.6/kg. At the new APM
price of USD8.4/mmbtu, we estimate that IGL will have to increase CNG price by
~INR9/kg.
13 January 2014
5

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