Global ratings agency Moody's has said the sharp cut in natural gas prices notified by the Indian government will not only impact state-run Oil and Natural as Corp (ONGC) but also discourage new exploration investments and fuel imports.
"The gas price reduction is credit negative for upstream producers ONGC and Oil India because it will lower their revenues and cash flows, which are already declining from low oil prices," an article by Moody's Credit Outlook said on Monday.
"The gas price reduction will have its greatest effect, in absolute terms, on ONGC, the country's largest producer of natural gas," it said, adding that it expected ONGC's revenues to decline by around $300 million and for Oil India Ltd by around $33 million.
Earlier, Standard & Poor's said the 18% cut in domestic prices of natural gas from $4.66 per unit to $3.82 per unit for six months starting October 1 will discourage oil exploration and production companies from committing new capital expenditure.
India sets natural gas prices by taking a volume-weighted annual average of the rate prevailing in the US, Britain, Canada and Russia. Prices are calculated on the trailing 12 month data with a lag of one quarter.
"India relies on natural gas imports to meet its energy needs. Imports accounted for 36% of the total natural gas consumption in India for fiscal 2015 and 39% for the five months between April 1 and August 30, 2015," Moody's said.
"Imports will continue to increase as low international gas prices stimulate demand for natural gas and low domestic prices discourage further investments by upstream players to explore and develop new gas reserves," it said.
"When oil prices are low, upstream players cannot economically produce from difficult terrains such as deep water, where costs are substantially higher," Moody's added.
The ratings agency said India should benchmark its natural gas prices to similar gas-deficient nations instead of using rates prevalent in gas-surplus areas like the US and Canada.
The agency said that fresh commitments by private oil ad gas companies will remain uncertain, given that several exploration firms globally had scaled back their spending and put new projects on hold amid low hydrocarbon prices.