Domestic gas prices are set to fall significantly from October because of a slump in global prices, raising a question mark on the pricing formula as it challenges the operational viability of oil firms and hurts investment sentiment in the exploration and production sector. Gas producers have sought a review of the pricing formula.

The domestic prices are set to fall to about $1.80 per mBtu from October 1 for the next six months, the fourth straight cut, which would significantly hurt domestic producers.

The gas price for locally produced fields has been revised from April 1 till September end to $2.39 per mBtu from $3.23 per mBtu, a 26 per cent decrease. The ceiling price for gas to be produced from difficult fields has also fallen to $5.61 per mBtu from $8.43 per mBtu, down 33.5 per cent.

Oil industry sources said a further cut in prices would make domestic production unviable. Gas producers have written to the oil ministry offering various suggestions, including a review of the formula that puts domestic producers at a disadvantage over imported LNG.

Industry sources said the existing formula is based on the gas surplus market and should not be applicable in India. They said ONGC in a recent communique to the government has stated that the break-even price to produce gas from new discoveries was in the range of $5-9 per mBtu.

In previous years, loss from the gas segment was offset by the gain in the oil business. But with the oil business itself coming under severe strain because of a sharp slump in benchmark prices, it has become difficult for the company to meet even the operating expenses, they said.

The reduction in natural gas prices would mean lower raw material cost for compressed natural gas (CNG) and piped natural gas to households (PNG) and should translate into a reduction in retail prices. It would also mean lower feedstock cost for power generation and the manufacturing of fertilisers.

However, this could impact the revenue of state-owned PSUs such as ONGC and Oil India, which produce 83 per cent of the domestic gas. Other producers such as Reliance Industries, Vedanta and Hindustan Oil Exploration Company would also see their revenues going down.