The continuing low in domestic gas price will benefit profitability of end-user industries such as fertilizer and city gas distribution (CGD), India Ratings and Research has stated in a recent report.
However, this will impact the profitability of upstream natural gas producers, which will remain subdued due to lower realizations and higher production cost, the report added.
This comes against the backdrop of India keeping domestic natural gas price unchanged at $1.79 per metric million British thermal unit (mmBtu) for the first six months of the current financial year under the domestic gas price regime, which was introduced in 2014.
Also, the ceiling price for gas from difficult fields such as deep water, ultra-deep water and high pressure-high temperature areas for April-September was reduced to $3.62 per mmBtu from the earlier price of $4.06 per mmBtu.
“The low domestic price is a result of subdued benchmark prices, particularly the Henry Hub (HH), over the reference period 2020,” India Ratings and Research said on Wednesday.
The bi-annual price revision exercise fixes the price at which domestic natural gas is supplied by explorers such as Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd (OIL) to urea manufacturers, power generation firms, and compressed natural gas (CNG) and piped natural gas (PNG) firms.
“Natural gas is the primary feedstock for the majority of fertilizer production in India and this sector consumes the highest amount of natural gas (29% share) in India, followed by the CGD sector (20% share) and power sector (19%). While the nitrogen-phosphate-potash (NPK) fertilizer manufacturers are largely dependent on imported natural gas, urea manufacturers rely on both imported and domestic gas for their feedstock requirements, which is governed by the pooled gas pricing mechanism,” the report said.
Gas comprises about 6.2% of India’s primary energy mix, far behind the global average of 24%. The government plans to increase this share to 15% by 2030. India’s gas demand is expected to be driven by the fertilizer, power, CGD, and steel sectors.
The India Ratings and Research report said the fertilizer pooled gas prices will be marginally impacted by domestic gas prices and there will be limited impact on fertilizer subsidy burden and credit metrics.
“The affirmation of gas prices is likely to keep the subsidy burden under check, as the pooled prices are unlikely to increase. However, the driver of the subsidy burden would continue to be imported LNG prices. For every $1/mmBtu decrease in the pooled gas prices and in the imported LNG prices, the urea subsidy burden decreases by Rs1,750/tonne(t) and Rs1,120/t respectively, assuming a weighted average energy consumption of 5.826Gcal/t and INR/USD of 74.5,” the report said.
The price is on a gross calorific value (GCV) basis. Calorific value is heat value obtained from one volume unit of gas. While net calorific value (NCV) doesn’t take into account the latent heat of vaporization, GCV includes all the heat released by the fuel.
Also, the CGD sector will continue to benefit.
“The continued low domestic gas prices would keep benefiting the operating margins of CGD entities in the CNG and domestic PNG segments. CGD players did not pass on the full benefit of the natural gas price decline to end-consumers, given their absolute profitability was already under pressure due to the decline in volumes during FY21 caused by the lockdown in Q1FY21. If volumes were to take a beating, given the rise in covid cases in select states in India, players might decide to hold on to the prices,” the report added.
The new price will be applicable from 1 April till 30 September. In October 2014, the National Democratic Alliance government announced a new gas pricing formula using the weighted averages of prices in the three major international gas trading hubs of US Henry Hub, the UK National Balancing Point and Japan’s custom-cleared rate.