High prices to hit Indian gas demand
India’s gas demand and LNG imports are likely to see a drop in the 12 months ending March 31, 2022 (FY22), owing to a sharp spike in global and domestic gas prices, according to industry experts.
Investment bank UBS in a report published on October 1 said that it is reducing forecasts for the country’s gas demand by 4% and 3% in FY22 and FY23 respectively. It also expects a cut in the LNG import volumes.
Over the last quarter, international gas benchmarks including Henry Hub (HH), UK National Balancing Point (NBP) and JKM spot LNG prices have seen an unprecedented rally. India, being a net gas importer, where domestic gas prices are linked to the gas benchmarks, has been hit hard by this sharp increase.
India on September 30 hiked the regulated wholesale prices of locally produced natural gas with effect from October 1. For the October 1, 2021-March 31, 2022 period, the price paid to most domestic natural gas producers will be $2.9/mn Btu, up from $1.79/mn Btu during April 1-September 30 period. The price of locally-produced gas is set every six months through a formula linked to global rates.
UBS expects a further revision in domestic gas prices in FY23 to $4.7- 5.7/mn btu.
“On the other hand, JKM spot LNG prices are hovering near $30/mn btu, while forward curves indicate elevated prices. Though this augurs well for upstream companies like ONGC, gas utilities and CGDs [city gas distribution] have challenges from impact on demand and passing through of rising gas costs,” UBS said.
Rating agency ICRA also holds a similar view about the gas demand in India.
“There would be a reduction in spot LNG volumes. However, spill over of high spot gas prices into FY23 looks likely given the low inventories and coal shortages. Any additional odd weather patterns that lead to spikes in consumption could also aggravate the demand situation,” Prashant Vasisht, vice president and co-head, corporate ratings, ICRA told NGW.
Hit on sector dependent on spot LNG
UBS sees a direct impact on the few sectors which were dependent upon spot LNG for meeting gas demand. LNG consumption in refineries, power, small industries, and steel would be impacted given JKM spot LNG prices are near $30/mn btu.
The investment bank expects refineries to switch to liquid fuels, gas-based power to remain unscheduled, and small industries to shift to alternative fuels.
“Though some of this demand had shifted to rising domestic gas output from Reliance KG basin, yet demand can remain unmet,” UBS said. “Though India has imported about 25mn metric tons [of LNG] in FY21, out of that 16-17mn mt was long-term contracted and hence remained unaffected. However, demand which came from lower spot prices last year would dry up. Hence, we cut our estimates for India gas demand and LNG imports for FY22/23E.”
According to ICRA, the key industrial sectors to be impacted because of higher gas prices would be ceramics, glass, steel, dairy and engineering. It expects refineries and commercial entities like restaurants, hotels and hospitals to be hit as well. High prices could have an impact on the switchover to gas in the wider economy as industrial consumers might rethink their strategies, Vasisht cautioned. He expects Indian LNG imports to be down by about 5% in FY22 compared with FY21.
Gas utilities remain protected
During the first six months of FY22, India’s domestic gas output rose 21% year/year to 89mn m3/day, on the back of gains at Reliance fields in the KG basin and Vedanta's Rajasthan block. According to UBS, this has protected gas transmission volumes and an improved mix of domestic gas for state-owned gas marketing companies like Gail and GSPL.
“However, near term growth would be missing due to lower LNG imports. For Petronet LNG, lower spot volumes would result in lower utilisation, though sharper decline in utilisation would be safeguarded with long term/use-or-pay contracts,” UBS said.
City gas companies to pass through higher gas cost to consumers
UBS foresees CGD companies fully passing through the potential rise in domestic gas cost to CNG and domestic piped natural gas customers. Even after the price hike, CNG will be 45-55% cheaper than liquid fuels like gasoline and diesel, it said.
Because of the price advantage of CNG over liquid fuels, UBS expects a limited impact on margins for gas retailers like Indraprastha Gas and Mahanagar Gas.