India Set To Hike Natural Gas Price In October Revision

The Japan Korea Marker, an international spot market benchmark, has jumped more than 5.6 times in the last one year, according to Bloomberg data. JKM Futures were at a record $27.15 per metric million British thermal unit on Sept. 21.

Global gas prices surged in the past few months because of high summer temperatures that stoked demand for gas-fired power in China, according to ICRA Ltd. and Fitch Ratings Ltd. Low inventories in storage, strong demand in Asia, a recovery in Europe, and insufficient supply from exporting nations such as Russia and Australia contributed. The prices are unlikely to fall in the next few months as consumption will rise during the upcoming winter in the northern hemisphere.

Prices in India, under the administrative pricing mechanism, had slumped 51% between the first half of FY20 and the first six months of FY22. Brokerages including ICICI Securities, Emkay Global and Motilal Oswal now expect it to increase from $1.79 per mmBtu to $3-3.15 a unit in the next six month after next semi-annual revision in October.

The price of deep-water gas is currently at $3.62 per mmBtu. Emkay expects gas from difficult fields to hit $7 per mmBtu in October and $10.7 per mmBtu by April 2022.

In June 2021, Oil & Natural Gas Corp., the country’s largest gas producer, had predicted administered prices to rise 50-60% in the second half of FY22.

The administered price formula considers the volume-weighted annual average prices of four global benchmarks—U.S. Henry Hub, Canada Alberta Gas, U.K. NBP, and Russian Natural Gas—with a lag of one quarter. For instance, for the price in October 2021-March 2022, the weighted average of July 2020-June 2021 will be used.

Between July 1, 2020 and June 30, 2021, prices of both Henry Hub and Canada Alberta jumped more than twofold, while U.K. NBP surged over 5.6 times, Bloomberg data showed.

The benchmarks have jumped 30% so far in the ongoing quarter ending September. That’s likely to support an upward revision in domestic administered prices .

Gas Price Forecast

• ICICI Securities expects APM gas price to rise to $3.15 per mmBtu in the second half of FY22 and subsequently to $5.9-7.7 per mmBtu in the first and second half of FY23.

• Haitong sees more than 70% upside in domestic gas price in the next revision to nearly $3.1 per mmBtu.

• Emkay estimates APM price to rise from 1.79 per mmBtu to $3 in October. The price is expected to rise to $5.6 per mmBtu in subsequent revision in April 2022.

• Motilal Oswal expects domestic APM gas prices to be raised by 70% to $3.1 per mmBtu.

• Prabhudas Lilladher sees domestic gas prices to rise to $3 per mmBtu in the second half of FY22.

• ICRA expects domestic gas prices to double in the next revision.

Price Hike Impact

City Gas Distribution

• According to ICICI Securities, Gujarat Gas Ltd., Mahanagar Gas Ltd. and Indraprastha Gas Ltd. need to hike CNG prices by 49-53% in October 2021-October 2022 to pass on the gas cost rise and to maintain margins.

• Motilal Oswal in its July report said for every $1 per mmBtu increase in domestic APM gas price, Indraprastha Gas and Mahanagar Gas need to take a Rs 4 per kg hike in CNG.

Gas Producers

• The increase in gas prices will be favourable for ONGC and Oil India Ltd. Emkay estimates that for every $1 per mmBtu change in APM gas prices, ONGC and Oil India’s FY23 earnings per share would change by Rs 2.3 and Rs 4.0 per share, respectively.

• According to ICICI Securities, upside to the EPS of Oil India and ONGC is likely at 8% and 14%, respectively, for FY22E, and 17% and 27% for FY23E due to the expected rise in deep-water and APM gas prices.