Domestic gas prices or the APM gas prices have been on a downward trend since the second half of FY15 and experts believe the prices are expected to fall further this year due to weakness in the global gas markets. In the first half of FY21, the APM gas prices are estimated to fall by 25 percent to $2.7/mmbtu.
The APM (administered pricing mechanism) gas pricing is an average of Henry Hub prices (40 percent weightage) US, NBP –national balancing point (35 percent weightage) UK, Alberta (Canada-5 percent weightage), Russia (20 percent weightage).
The APM gas prices saw a spike in 2HFY15 when the Narendra Modi government scrapped the Rangarajan Committee recommendations soon after it took office in 2014.
The government put in place its own formula for domestic APM gas prices in India by linking them to 12M averages US, Canada, Russia and Europe prices.
As a result, the gas prices rose to $5.6/mmbtu in 2nd half of FY15. But since then, the prices continued to remain on a downward trend.
The global LNG prices are currently close to historic lows, with prices of the spot cargos at $3/mmbtu vs the long term contracts entered into by the companies at almost double the price at $6-8/mmbtu.
What do experts say?
Experts expect the downtrend to continue due to (i) favourable global natural gas demand-supply; (ii) large addition of LNG capacity, driving near-term oversupply; and (iii) increasing proportion of LNG in traded gas, leading to pricing convergence between regions.
They expect Asian spot LNG prices to fall further due to higher levels of inventory in Europe and likely expansion of regas capacity across Asia in 2020.
Wood Mackenzie in an interview to CNBC TV18 said that the amount of new gas supply coming in from the US has led to lower gas prices and there are not many LNG reliquefaction capacities coming on stream.
Edelweiss says that reasonable range for the imported gas price for next 2-3 years should be at $6-8/mmbtu since, globally, there is going to be an LNG oversupply and, due to coronavirus, cargos are stranded at Chinese ports.
Experts think that this is the best time to expand the gas-based economy in India as pricing is low. In fact, domestic APM gas prices are set to nearly halve to 10-year lows of ~$2/mmbtu over the next year.
Sharply lower EU prices on softer LNG are largely to blame but prices are subdued in gas surplus US, Canada and Russia too. Impact on consumers, producers
The city gas distribution companies have been one of the biggest users of APM gas since they received preference in terms of the distribution of domestic gas to the CNG pumps.
If the price cut is not passed on to the customers, this would increase EPS of Indraprastha Gas and Mahanagar Gas by 20-25 percent. For Gujarat Gas, EPS growth would be 13 percent as it has higher volumes from the industrial segment.
GAIL India would benefit too as a $1 change in the APM prices would lift EPS by 5-6 percent due to a fall in LPG costs.
Power producers will become more competitive in the merit order despatch and fertiliser feed will become cheaper cutting subsidies.
While lower gas prices are very positive for the consumers, it might not be such good news for the producers like ONGC, Oil Inda and Reliance Industries.
Every $1 impacts EPS for ONGC and Oil Inda by 14-16 percent. The two producers will suffer as gas EBITDA is likely to halve year-over-year in FY21E to their lowest levels since prices were first deregulated in May 2010.Such prices may do little to incentivize domestic production too that has slipped to four-year lows in stark contrast to the government's target of raising the share of gas in India's primary energy to 15 percent. In order to meet the target, the gas supply is required to quadruple by 2030.