The Indian Gas Sector has been severely impacted due to the retreating domestic gas availability and subdued response in domestic Exploration and Production segment. Experts believe that given the present condition, there may not be a significant turnaround in the domestic gas availability scenario in the next 4-5 years as any discovery even today would take a minimum of 4-5 years to reach its commercial production stage. While the country needs natural gas for generating electricity, for manufacturing fertilizer, for process heating, for running vehicles, etc. however, the appetite is limited to the price the consumer segments can afford. While Power & Fertilizer forms about 65% - 70% of the overall natural gas demand, these and are highly sensitive to input gas price because of the restrained pricing at the respective end user market. Precisely the reason why around 12% of total power generation capacity (around 2,25,133 MW) which is gas based is in doldrums due to unavailability of low cost gas.
The recently announced New Uniform Gas Price (as per the Rangarajan Committee, approved by CCEA) is believed to put the well-head price of all domestic Natural Gas in a range of USD 6.76/MMBtu – USD 8.4/MMBtu. Since the mechanism allows for quarterly revision in prices, InfraInsights believe that the prices shall further go up, say- USD 10.29/MMBtu in FY15 and USD 10.92/MMBtu in FY16. The move is likely to boost further investment in E&P sector and move towards reducing costly LNG imports. Until recently, RIL had been demanding a price of not less than USD 13/MMBtu. GSPC had demanded a gas price in a range of USD 13-14 / MMBtu for its blocks in KG D6 basin. On a similar note, PSUs ONGC and OIL had been demanding a price not less than USD 7/MMBtu. Clearly, the government is looking at incentivizing E&P activities in the country by raising the benchmark well head gas price much closer to the international gas prices and bringing uniformity in gas prices in the country. In order deep dive and understand the implication of this gas price hike on different stakeholder in Industry, InfraInsights recently concluded its research report “Impact of Gas Price Hike on Stakeholders and Industries across the Gas Value Chain”, some of the findings are listed below:
- The impact of the gas price hike is likely to be felt across the gas value chain. The E&P companies are likely to see an improvement in the bottom line. For upstream companies, Gas price hike is likely to boost the earnings and result in re-rating of stock prices. For example, for ONGC is likely to see EPS of about INR 41-42/share (a hike of ~ 68% - 72% over FY13) in FY15, considering that the rupee stabilizes at INR 56/USD.
- For the mid-stream segment (RLNG terminals and Cross-country gas pipelines) the move is expected to facilitate RLNG projects in the country as:
- Increased domestic gas price may create an acceptance of imported LNG; and
- Any upside in domestic gas availability may favor pooling of high cost LNG in the country.
- The gas pipeline industry may be benefited by improved pipeline capacity utilization and further improvement in domestic gas availability is likely to incentivize the development of new gas pipelines in the country leading to enhanced natural gas penetration (around 30,000 Km of gas pipeline network is envisaged for the national gas grid).
- In downstream segment, such as CGD, limited pricing power with CGD entities due to high input gas cost and corresponding subsidies in domestic LPG, transport HSD and volatility in FO prices in industrial segment is likely to make the business more challenging for gas distribution companies.
- In case of non-conventional gas sources, the price hike and price uniformity is likely to offer CBM monetization opportunity in India in long term, due to – Compensation for high cost of CBM production and safeguarding of consumer base due to parity in gas prices (conventional and non-conventional).
- For gas consumers, such as power, impact of gas price hike to be felt more by utilities in Western Region due to relatively higher concentration of natural gas based power plants. For example: GSECL’s avg. landed cost of gas is ~ INR 12/SCM or ~ 5.81 USD/MMBtu. Post gas price hike, the landed cost may fall between USD 9 – 10/MMBtu. With every 1 USD rise in gas price the generation cost increases by ~ 0.45 INR/KWh (INR 60/USD).
- In case of fertilizer, Urea realization price increases by USD 2/MT for green/Brownfield projects for every USD 0.1/MMBtu rise in gas price. An increase in gas price from a base price of USD 6.5/MMBtu to up to USD 9.0/MMBtu increases the realization price or government subsidy by 18%. Further, with landed gas price at USD 9 – 10/MMBtu, the imported Urea may infact become more competitive as compared to indigenously produced urea in the country. The hike in gas price is also likely to result in an increased subsidy burden. In fertilizer, assuming urea selling price to remain at a subsidized rate of INR 5,365/MT, the subsidy burden may increase by additional INR 5,040/MT – INR 8,064/MT in short to medium term (at INR 60/USD), post implementation of CCEA approved gas pricing formula.
- All the same, Power sector to be hit by ~INR 8000 crore a year for every $1 increase, at 70% PLF for 28,000 MW of monitored gas based power generation capacity.
In a broad sense, hike in gas price to offer revenue gains to the E&P companies and Government, which however, may be offset by subsidy burden from increase in cost of power and fertilizer, in case end consumer prices are kept subdued. Price hike may encourage E&P companies to make investments which may improve domestic gas availability scenario in long term. Raising of gas benchmark price to incentivize development of FSRU and RLNG terminals in the country and also enhance gas pipeline infrastructure in the country in the years to come. For more, book your copy of the research report, contact firstname.lastname@example.org