Rising Gas Costs To Hurt India’s Gas Demand, UBS Says
UBS has cut India’s gas demand forecast for the ongoing and next fiscal as spot LNG prices spike.
Over the last quarter, international gas benchmarks such as Henry Hub, UK National Balancing Point and JKM spot LNG prices have seen an unprecedented rally. India, being a net gas importer and where domestic gas prices are linked to the benchmarks, has a direct impact from this sharp increase, the research firm said in a report. UBS expects a further hike in India’s natural gas prices to $4.7-5.7 a mmBtu in FY23 from $2.9 now.
That prompted the research firm to reduce the nation’s gas demand estimates by 4% and 3% for FY22 and FY23, respectively, as well as cut its gas transmission/LNG import volumes.
India imported 25 million metric tonnes of LNG in FY21, of which 16-17 MMT was long-term contracted and remained unaffected, UBS said. But the demand that came from lower spot prices last year would dry up.
While the increase in domestic gas prices augurs well for upstream companies such as Oil & Natural Gas Corp., gas utilities and city gas distributors will face challenges from the impact on demand and risks of consumers shifting to alternative fuels from when they pass on rising costs to CNG and piped natural gas.
But even after a price hike, the report said CNG would be 45-55% economical compared to liquid fuels. That would limit the impact on margins for Indraprastha Gas Ltd. and Mahanagar Gas Ltd. as CNG/domestic PNG makes up about 80% of sales volume.
“Higher spot LNG/crude-linked gas prices, however, would increase cost of gas for industrial segment. We see downside risks to industrial segment margins of Gujarat Gas Ltd. (industrial constitutes about 80% of portfolio) in FY22-23E”, UBS said.
For gas utilities, reduced spot volumes would lower utilisation for Petronet LNG Ltd., though a sharper decline in utilisation would be safeguarded by long-term contracts, UBS said. Increased domestic output, on the other hand, aided the gas transmission volumes for Gujarat State Petronet and GAIL (India) Ltd. But GAIL’s exposure to the Henry Hub-indexed gas would translate to lower gas marketing earnings, the report said.
UBS also expects a direct impact on the sectors that are dependent on spot LNG for meeting demand such as refineries, power, small industries and steel, though some of these may shift to alternative fuels. Some of this demand, the report said, has shifted to rising domestic output from Reliance KG basin, yet it can remain unmet.
In a separate report, however, HSBC predicted city gas distributors to increase the country’s natural gas demand by 35% by 2030. The research house anticipates GAIL and Petronet LNG to be the key beneficiaries of India’s rising gas demand in the long term.
Upside and downside risks to UBS’ estimates:
Higher fuel subsidy burden if oil prices rise sharply and the government intervenes in deregulated prices of transport fuels.
A decline in availability of domestic gas volumes and imported LNG volumes could affect transmission volume assumptions.
Demand for LNG faces material risk if prices go up sharply and could impact LNG import assumptions.
Lower-than-estimated tariff approved by the regulator could affect transmission revenue assumptions.
City Gas Distributors
Significantly higher/lower alternative fuel prices that could drive higher/lower volume and improve/decrease pricing power for the sector.
Faster/slower-than-expected rollout in new geographical areas could drive volume growth above/below estimates.
Any changes in government policy to support the sector such as a ban on the use of alternative polluting fuels could drive volumes.