Low natural gas prices are negative for upstream companies, as they hurt revenues, profitability and cash accruals. Incumbents have petitioned the government to fix a floor for gas prices
MUMBAI: The latest revision in domestic gas prices to $1.79 per million metric British thermal unit (mmBtu), for April-September, is the lowest and is unfavourable for domestic producers even as it will benefit consumers, rating agency Icra said in a note.
The ceiling on price for gas produced from deep water, ultra deepwater, high-pressure and high temperature fields has also been lowered to $3.62 per mmBtu for the period, down 10.8% sequentially.
“Going forward, the supply glut is expected to keep prices of domestic gas low in the near-to-medium term leading to poor returns even as domestic gas producers such as ONGC and RIL-BP ramp up gas production significantly," said Sabyasachi Majumdar, senior vice-president & group head, Corporate Sector Ratings, Icra.
For every $1 per mmBtu variation in price, the cost of generation varies by 60-65 paise per unit for gas-based power generation projects at prevailing rupee dollar exchange rate.
The absence of a floor and sustained low prices make exploration and production unviable even for benign geologies, as seen over the past few years post the implementation of the modified Rangarajan formula.
Accordingly, low natural gas prices are negative for upstream companies, as they hurt revenues, profitability and cash accruals. Incumbents have petitioned the government to fix a floor for gas prices.
In a relief of sorts, the weakness in the Indian rupee against the US dollar will likely aid realisations of gas producers but only to an extent.
Spot LNG (liquefied natural gas) prices had breached $30 per mmBtu in February 2021 due to the jump in oil prices, unplanned outages at export facilities in several countries, multiple cold waves, high shipping rates and delays in the Panama canal.
Though spot prices have come down to $6-6.5 per mmBtu, low inventories as winter ends will support prices, as will demand, with north Asia and Europe looking to replenish storage. Nevertheless, the supply overhang remains with about 37.6 MTPA (million tonnes per annum) liquefaction capacity added in 2019 and 27.8 MTPA in 2020, besides which capacity additions till 2025 will be in excess of incremental demand which will weigh on gas prices.
From the consumers’ perspective, low gas prices are a positive and will lead to a competitive generation cost for domestic gas-based power generation projects. Given the cost-plus nature of power purchase agreements (PPAs) tied-up by gas-based power projects, the benefit is expected to be passed on to the customers, mainly state distribution utilities (discoms).
However, benefits will be limited for discoms, given the subdued utilisation of the gas-based power plants in the country, with annual average PLF (plant load factor) of 22-25% amid inadequate supply.
During the first eleven months of FY21, gas supply from domestic sources remained low at 22% of the allocated quantity for gas-based power generation units, as per data from Central Electricity Authority.
Moreover, with the uptick in spot LNG prices, consumption by gas-based power projects fell to 2.62 MMSDCM in February from 11.85 MMSCMD in October last year.
For the fertiliser sector, nearly 36% of the gas requirement is met through domestic sources, while the rest is catered to by re-gasified LNG imports. The sector is supplied gas at pooled pricing, which takes into account the weighted average of domestic and R-LNG prices.
With no change in the domestic prices, the pooled prices will stay at current levels, although term LNG prices have risen over the last couple of months with the strengthening of the crude oil prices.
The overall pool price is expected to remain in the range of $9.5-10 per mmBtu for FY2022, if crude oil prices stay at current levels.
As per Icra's estimates, for every $1 per mmBtu rise in pooled price, the subsidy requirement for the urea sector rises by Rs4,500-5,000 crore. With pooled prices at these levels, the subsidy budget for the urea sector will be adequate for FY22.