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Mumbai: After nearly a year of falling demand for imported natural gas in India, gas-contracting and -supplying companies can finally look forward to better times as demand for spot natural gas is picking up.

If early signs are anything to go by, both Petronet LNG Ltd and Gujarat State Petronet Ltd (GSPL) have shown an uptick in volumes in natural gas sales in the first quarter of the financial year.

Petronet and GSPL are major natural gas suppliers in the country. While Petronet sources gas through imports in the form of liquefied natural gas (LNG), GSPL sources gas from its parent company Gujarat State Petroleum Corp. Ltd. Together the two companies supply close to 60 million metric standard cu. m per day (mmscmd) of gas, equivalent to 46% of India’s total gas demand.

With long-term contracts of these companies finding no takers, the recent jump in sales has come from the demand for spot LNG.

LNG is essentially a form of natural gas that is cooled and compressed to liquid form before transportation through tankers via seaborne trade.

This shift from long-term to spot contracts is a good signal for Petronet, GAIL (India) Ltd and GSPL, which have been trying to push spot natural gas volumes.

Most of these companies have been losing customers and running their pipeline and terminal capacities at lower utilization levels as customers postponed purchases of high-priced long-term natural gas. They were also building unwanted inventories of natural gas.

Imported natural gas can be bought by companies in two ways—through long-term contracts, whose price is fixed for a certain number of years, and on a spot basis, under which the price changes with the change in the price of crude.

For long-term contracts, which form the bulk of contracts of companies such as Gail and Petronet, the price continues to be around $12-14 per million metric British thermal unit (mmBtu) while spot LNG is currently priced at $8 per mmBtu.

“The price difference between the two has made many consumers postpone their offtakes from these (Petronet, GAIL and GSPL) companies in the past one year. However, we are seeing a shift in consumer preference from long term to spot, especially steel and power companies," said Sushil Maroo, chief executive officer, Essar Energy Plc.

He said there has been a slight increase in demand from industrial customers for spot natural gas and this demand is expected to go up further after the monsoon.

Commenting on GSPL, analyst Jal Irani of Edelweiss Securities Ltd wrote in a report on 30 July that volumes for the company revived as refineries (Reliance Industries Ltd and Essar Oil Ltd) operated at higher utilization in the absence of major shutdowns during the quarter while taking advantage of continued weakness in spot LNG prices.

“Although there will be temporary shutdowns by refiners in Q2 FY16 (second quarter, fiscal year 2016), the management nevertheless expects volumes to remain robust," he wrote in a separate report on 7 August.

For the quarter ended June, Petronet posted an increase of 86% quarter-on-quarter and 17% year-on-year in spot volumes. GSPL too posted a jump in spot volumes by 7% quarter-on-quarter and 9% year-on-year for the June quarter. Both companies posted results ahead of Street expectations in the quarter.

Gail posted a 17% drop in its net profit in the first quarter to 424 crore.

The shift towards spot gas is expected to hold firm if crude oil continues to be at the current level of under $50 a barrel and this can lead to a further fall in spot prices, said Salil Garg, director, corporates, India Ratings and Research Pvt. Ltd.

“There is a certain stream of products in the fertilizer segment which was not viable at a price of $12 per mmBtu. But with spot prices coming down to $8 per mmBtu, companies are contemplating restarting units," he said.

If prices continue to stay at current levels or go down even further, Garg said, a major spurt in demand can come from stranded gas-based power plants under the gas-pooling mechanism.

Under the mechanism, close to 9,000 megawatts (MW) of power is expected to be supplied with 10 mmscmd of gas , out of the total of 14,000MW in stranded gas-based capacity.

An analyst with a domestic brokerage, who did not want to be named due to company policy, said from the third quarter onwards, all the three companies—Petronet, Gail and GSPL—can clock higher spot volumes as demand increases from not only power companies, but also steel and cement makers.

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