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Range for imported gas price over next 2-3 yrs seen at USD 6-8/mmbtu, says Edelweiss Financial Services

Updated : February 19, 2020 12:54 PM IST

The Petroleum and Natural Gas Regulatory Board (PNGRB) chairman yesterday told CNBCTV18 that guiding principles for open market access to gas customers will be put in the public domain in the next 3 months and in the 3 months thereafter, they will start ending the exclusivity enjoyed by city gas companies.

Discussing the impact of this development on gas companies, Jal Irani, oil & gas analyst, Edelweiss Financial Services said, "Essentially, it will be a function of what the tariff is going to be and the returns the companies will get on the open access, which is believed to be about 20 percent of the volumes," said Irani.

"Assuming that it is a reasonable return of 14 percent on incremental 20 percent volumes this should be value accretive to the companies," he said, adding that one will have to see how the whole thing works out.

There is a belief that since global gas prices are low, this would be best time to shift from other fuels to a clean energy like gas.

Irani said fall in global liquefied natural gas (LNG) prices is positive for Indian companies because there are different uses of gas. “Power which is the largest consumers of gas but at the same time coal has been more competitive than gas domestically. At USD 3 free on board (FOB) if you add import duty, sales tax, regasification cost, then fully loaded price comes to about USD 5.5 mmbtu, which translates into a power tariff of about Rs 2.5 a unit for power generator,” he said, adding that “At that price it’s not only cheaper than imported coal but it is almost on par with even domestic coal for generation of power. Now that doesn’t necessarily mean that gas capacities are going to setup overnight but that does mean that there is already about 23-24 gigawatts of gas power capacity barely running at utilization of about 30 percent and they have got an ability to take on more gas and be viable.” It looks like it will be a large opportunity for India, Irani further added.

According to Robert Sims, research director at Wood Mackenzie the amount of new gas supply coming in from US has led to lower gas prices.

Speaking about long-term contracts, he said, “The long-term contracting market, in fact the whole investment cycle around new projects runs in a different market to the current spot price. We know that because despite halving prices last year; project sanctions last year were 17 million tonne as a record for project sanctioning. We are expecting in 2020 for another 50 million tonne per annum of new project sanctioning to happen and there is a lot of potential upside from that, especially in the US. Producers are taking a view that prices will recovery despite the low spot prices at the moment."

“Another view is that the market is very volatile and what the market price is today may not actually be a fair fundamental price. We have a view that the fair fundamental price for 2020 and 2021 is around USD 4.5 per mmbtu but that picture changes quite dramatically post 2021 because there are not many new LNG re-liquefaction coming on, commissioning in 2022 to 2025 and as a result we expect the market to rebound quickly,” added Sims.

According to Irani, a reasonable range for imported gas price for next 2-3 years should be about USD 6-8/mmbtu.

“The availability of gas for India and in India, is poised to go up dramatically. India is going to more than double its LNG capacity in next 5 years. In addition to that some new supplies of domestic gas, which is coming on stream both from Reliance Industries and ONGC which should increase the domestic production also by 50 percent,” added Irani.

The domestic gas is likely to be priced in the region of USD 5/mmbtu versus spot LNG imported price in excess of USD 6/mmbtu. So, there will lot of cheap gas coming in as well as produced domestically, said Irani.

Disclosure: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.

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