Falling LNG Prices Will Lift City Gas Distributor Margins 250-300 Bps: CRISIL
A 22-25% decline in the prices of liquefied natural gas (LNG) since January this year, and an expected 5-7% increase in consumption of piped natural gas (PNG) and compressed natural gas (CNG) should drive up the operating profit margins of city gas distribution (CGD) companies by 250-300 basis points (bps) in the first half of fiscal 2020.
That would reverse the trend of contraction seen in the first three quarters of fiscal 2019.
CRISIL Research estimates spot LNG prices to be in the $6.5-7 per mmBtu range in the first half of fiscal 2020.
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 gassifiers in Morbi and Wankaner ceramic clusters in Gujarat would drive LNG demand in the region. The ban on polluting fuels in northern states, too, would whet the appetite for LNG.
Says Prasad Koparkar, Senior Director, CRISIL Research, “The margin improvement would be more pronounced for CGD entities with a higher share of industrial consumers of PNG. In the last 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.
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 the clear cost advantage of these fuels over alternates such as petrol and LPG.
In India, the 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 the domestic-gas price by 7-9% 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% increase over current prices. In the household PNG segment, an increase of 2-2.5% is expected.
However, despite this price increase, CNG would be ~35% cheaper than petrol. And though household PNG could become expensive by Rs 1.5-2 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.
Says Rahul Prithiani, Director, “CRISIL Research expects spot LNG prices to remain low going forward given a slow improvement in LNG demand from China and an increase in the supply of LNG with expected new liquefaction terminals. LNG export facilities in Cameroon (Louisiana) and Freeport (Texas) are expected to become operational by the first quarter of fiscal 2020, with 25-30 mtpa capacities likely to get commissioned by end 2019.”
Gas volumes, on the other hand, would be supported by the development of gas infrastructure in untapped areas, given the upcoming LNG terminals at Ennore and Mundra, pipeline connectivity from Jagdishpur to eastern states such as Bihar, Jharkhand, West Bengal and Odisha, increasing penetration of the infrastructure in existing areas, regulatory push to build extensive gas network in various parts of the country, and restriction on burning dirty fuel.