Will Petronet LNG Benefit From Lower Gas Prices?

A fall in prices of liquified natural gas in Asia offers state-owned Petronet LNG Ltd. a chance to use its additional capacity coming on-stream by June to sell the fuel at a higher margin.

The Singapore liquified natural gas prices—the benchmark LNG prices for Asia—have declined close to 40 percent to $5.1 per million British thermal unit from start of the year, according to Bloomberg data. That’s because of a supply glut and high inventory in North Asia.

Petronet’s Dahej, Gujarat plant with a capacity of 15 million metric tonnes per annum is running at a utilisation of over 100 percent because of long-term contracts it signed. That doesn’t allow the India’s largest gas importer and regasifier to sign new contracts based on spot prices.

But the company is expanding its capacity to 17.5 MMTPA and that is expected to be completed by June.

One of the concerns around Petronet LNG for long time was that there were no off-take contracts tied-up ahead of this capacity expansion, said Probal Sen, senior vice president research, Centrum Broking. But it becomes an advantage as spot LNG prices have fallen sharply, he said.

Gas contracts are indexed to oil prices through slope. Most gas contracts in Asia have a slope of 11-12 percent—which means if oil trades at $100 a barrel, the gas will cost $11-12 per unit.

In the spot market, slope has fallen to 6-7. That implies spot prices are at a further discount to long-term contract prices.

That gives Petronet LNG room to get fresh contracts linked to spot prices and charge a higher margin, since it’s the dominant gas importer in the country.

While Sen agreed that these spot prices may be positive from six-month perspective, he said it’s not certain whether it will sustain. He said long-term contracts would be required to ensure stability and earnings visibility.