Sectors To Watch As India’s Regulated Gas Price Is Set To Double

India’s domestic gas price is set to at least double in the April 1 revision, tracking rising global prices. Analysts said that may squeeze margins of city gas distributors in the short term and increase India’s fertiliser subsidy.

The expected increase will be the second straight hike under the administered pricing mechanism for gas produced within the country. In October, the government raised it 62% for the six months ending March.

The Japan Korea Marker futures, the international spot gas benchmark, have surged fivefold in the last one year. While it has retreated from a high of $51.7 a metric million British thermal unit hit in the first week of March, Bloomberg data shows it’s still trading at more than $34.

The prices have surged due to low gas inventories, rising demand in Asia, odd weather patterns including a cold European spring and hot Asian summer, and supply disruptions. Russia’s Ukraine invasion has driven prices higher amid uncertainty over Russian supply to central Europe.

The current APM price stands at $2.9 an mmBtu. It’s $6.13/barrel for gas produced from deepwater or difficult fields.

The APM gas price is based on a volume-weighted annual average prices of four global benchmarks—US Henry Hub, Canada Alberta gas, UK NBP, and Russian Natural Gas—with a lag of one quarter. For the price for April-September period, January-December prices will be considered. The Henry and NBP hubs have about 75% weight on the index.

The benchmarks not only surged last year, but continued to rise in the ongoing quarter. That suggests price may rise even in the second half of the next fiscal starting October.

Brokerages anticipate an at least twofold jump in the upcoming revision:

• Emkay estimates APM to rise from $2.9 an mmBtu to $6.5 an mmBtu in H1FY23 and expects an average of $6 an mmBtu in both FY23 and FY24.

• ICRA expects it to more than double.

• Nomura expects the APM gas price rise to more than $6.5-7/mmBtu in April, and to $10-12/mmBtu in Oct-22, unless the government introduces a ceiling.

• Jefferies it to rise from $ 3.2/mmBtu to $ 7.3/mmBtu in April and to $8.8/mmBtu in October.

• India Ratings and Research sees it rising to $5.5/mmBtu considering the average benchmark prices.

• Reliance Industries in its third-quarter earnings presentation said the prices of domestic gas produced from difficult fields could go up to $10/mmBtu from $6.13/mmBtu.

Sector Impact

City Gas Distributors

The price increase will have a cascading impact on consuming sectors.

Domestic APM gas contributes around 85% of Indraprastha Gas Ltd. and Mahanagar Gas Ltd.’s sourcing and 20% for Gujarat Gas Ltd., Jefferies said in a report.

These city gas distributors may have to pass on the price increases in a graded manner with some lag, according to another report by ICRA Ltd., weighing on margin. Profit margins on CNG and piped natural gas (domestic) will also see some pressure due to the lag in priority allocation of domestic gas and a healthy growth in sales, forcing the companies to buy spot LNG to meet intermittent requirements, it said.

For a $1/mmBtu increase in domestic gas prices, assuming that the gas distributors maintain their current margin, the companies could increase CNG and PNG (domestic) prices by Rs 4.5-4.7/Kg and Rs 2.5-2.7/standard cubic metre, respectively, in Delhi, ICRA said.

Fertiliser, Power

The fertiliser sector's pooled price could rise, increasing the subsidy requirement if farmgate prices of fertilsers, especially urea, ​are not hiked, Bhanu Patni, senior analyst at India Ratings and Research, told BloombergQuint over the phone.

The viability of gas-based power plants is expected to remain weak at these high prices, she said.

Gas Producers

Higher prices will prove favorable for producers Oil and Natural Gas Corp. and Oil India Ltd.

Emkay estimates that for every $1/mmBtu change in the administered price, ONGC and Oil India’s FY23 standalone earnings per share will rise by 10% and 12%, respectively.