City gas firms to witness profit boost of 250-300 bps on falling LNG prices
That will reverse the trend of contraction seen in the first three quarters of financial year 2018-19
A 22-25 per cent decline in the prices of liquefied natural gas (LNG) since January this year, and an expected 5 per cent to 7 per cent rise in consumption of piped natural gas (PNG) and compressed natural gas (CNG) is set to drive up the profit margins of city gas distribution (CGD) firms by 250-300 basis points (bps) in the first half of 2019-20.
That would reverse the trend of contraction seen in the first three quarters of financial year 2018-19. Spot LNG prices are likely to be in the $6.5 per mmBtu to $7 per mmBtu range in the first half of next the financial year, according to CRISIL Research. If the LNG price holds at $7 per mmBtu, it would mean a positive impact on LNG demand, especially from price-sensitive sectors.
Also, the National Green Tribunal’s recent decision to shut down coal gasifiers in Gujarat would drive LNG demand in the region. The ban on polluting fuels in northern states, too, would increase the appetite for LNG.
The margin improvement would be more pronounced for CGD entities with higher share of industrial consumers of PNG. In the past 3-4 months, these entities were forced to slash industrial PNG prices to match alternate fuel prices, which have headed south following a sharp fall in crude oil prices since November, 2018. However, with the decline in LNG prices, industrial PNG has become cost-competitive with fuel oil,” said Prasad Koparkar, senior director at CRISIL.
At an average crude price of $64 per barrel, landed cost of fuel oil and liquefied petroleum gas (LPG) would be $12.1 per mmBtu and $16.9 per mmBtu, respectively. In comparison, industrial PNG would cost $11.7 per mmBtu and $12.3 at an LNG price of $7 per mmBtu and $7.5 per mmBtu, respectively. From the perspective of CNG and household PNG, strong demand is expected to continue because of clear cost advantage of these fuels over alternates such as petrol and LPG.
In India, domestic-gas price is revised every six months and is linked to prices on four international hubs Henry Bub in the US, Alberta in Canada, National Balancing Point in Europe, and Russian gas price. The next revision, for April-September, is expected to push up domestic-gas price by 7-9 per cent to $3.62-3.67 per mmBtu compared with $3.36 per mmBtu applicable till March 2019.
This increase is expected to be fully passed on to end consumers, making CNG and household PNG dearer. CNG prices are expected to increase by Rs 1.5-2 per kg in Mumbai and Rs 1.7-2.2 per kg in Gujarat amounting to a 3-4 per cent increase over current prices. In the household PNG segment, increase of 2-2.5 per cent is expected.
However, despite this price increase, CNG would be around 35 per cent cheaper than petrol. And though household PNG could become expensive by Rs 1.5 per mmBtu to Rs 2 per mmBtu compared with subsidised LPG, it would remain competitive with non-subsidised LPG. Hence, demand volumes in the two segments are expected to sustain despite the price hike.