Natural gas prices were cut by a steep 18% to $3.82 per unit on Wednesday, the biggest ever reduction in rates so far. This reduction will dent government revenues by about Rs. 800 crore and hit profits of producers like Oil and Natural Gas Corp (ONGC).

Natural gas prices, as per the formula approved by the government in October last year, will fall to $3.82 per million British thermal unit (mmBtu) on gross calorific value (GCV) basis for six months, beginning October 1, from the current %4.66 per mmBtu, according to the Oil Ministry.

On net calorific value (NCV) basis, the new gas price for October 1 to March 31, 2016 would be $4.24 per mmBtu as compared to $5.18 currently.

This reduction, the steepest ever, will hit producers like state-owned ONGC as well as central government whose earnings from royalty and income tax will dip by about Rs. 800 crore during the remainder of the fiscal, according to industry estimates.

State government earnings from VAT on gas sales will also fall by over Rs. 250 crore.

For ONGC, the move will results in a hit of Rs. 1,059 crore on its net profit, its Director (Finance) A K Srinivasan said.

The reduction in price is also likely to dent revenues of private gas producers but for Reliance Industries it would not make much of a difference as its earnings from eastern offshore KG-D6 gas field has been capped at 2014 price of $4.20 with incremental rate going towards meeting deficit created because of output lagging targets.

Using prevailing price in gas surplus nations like the US, Russia and Canada, the government had in October last year announced a new pricing formula that led to rates rising by about 33 per cent to $5.61 per mmBtu on NCV basis for a period up to March 31, 2015 from the long-standing price of $4.2.

The rates, on net calorific value (NCV) basis, dropped to $ 5.05 per mmBtu for six month period beginning April 1, 2015.

“In accordance with the ‘New Domestic Natural Gas Pricing Guidelines, 2014 issued by Ministry of Petroleum and Natural Gas, the price of domestic natural gas for the period October 1, 2015 to March 31, 2016 is $3.81 per mmBtu on GCV basis,” the ministry’s Petroleum Planning and Analysis Cell said.

While the cut will impact the revenue of producers like Oil and Natural Gas Corp (ONGC) and Reliance Industries, it will bring gains for users in the power and fertiliser sector in the form of lower feedstock cost.

As per the mechanism approved in October, 2014, the price of domestically produced natural gas is to be revised every six months using weighted average or rates prevalent in gas-surplus economies of US/Mexico, Canada and Russia to incentivise exploration in deep-sea that wasn’t viable at $4.2 rate.

Indian gas prices are calculated by taking weighted average price at Henry Hub of the US, National Balancing Point of the UK, rates in Alberta (Canada) and Russia with a lag of one quarter.

So, the rates for April 1 to September 30 period were based on average price at the international hubs during January to December, 2014.

The October 1, 2015 to March 31, 2016 rate will be based on average of prices during July 1, 2014 to June 30, 2015.

The current price of $5.61 per mmBtu is already among the lowest in Asia Pacific.

China pays explorers $11.9 per mmBtu rate for new projects while Indonesia and the Philippines price the fuel at $11 and $10.5, respectively.

Gas from offshore fields in Myanmar, where Indian firms ONGC and GAIL have stake, are sold to China for $7.72 per unit.

Thailand prices gas from new projects at $8.2 per mmBtu.

The only nations with lower rates than prevailing price are Vietnam ($5.2) and Malaysia ($5).