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City gas distributors face uncertainty on high gas prices

Prevailing higher gas prices sparked by geopolitical issues are now set to hit consumer demand
City gas distributors face uncertainty on high gas prices
The strong high double-digit growth in volumes seen earlier may be difficult now. mint

Last Updated: 12.31 AM, Aug 04, 2022

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Spiralling global prices of natural gas amid a surge in demand from Europe and lower supplies from Russia is posing a serious challenge for India’s gas industry.

The industry was until now in a sweet spot with growth spurred by strong demand for the cleaner fuel and comparatively cheaper gas prices.

However, the prevailing higher prices sparked by geopolitical issues since Russia’s invasion of Ukraine are now set to hit consumer demand as well as the profitability of Indian gas suppliers.

US benchmark Henry Hub natural gas spot price at over $8 per mmBtu (million British thermal units) has more than doubled on a year-to-date basis. Prices are likely to stay elevated considering the squeeze in Russian supplies. Also, approaching winters and consequent spike in demand from Europe is likely to maintain pressure on spot gas prices, at least till the winter season recedes or till supplies from Russia improve, according to analysts.

Analysts at Kotak Securities said Nymex natural gas price has managed to hold close to $8/mmBtu levels. With mixed factors in place, there might be some consolidation near $8/mmBtu before the next major move, the analysts said.

The prevailing high international gas prices and consequent increase in domestic gas prices, as well as spot gas prices, are negative factors for city gas distribution (CGD) firms. These companies had continued benefiting from rising demand and volume growth in a lower gas price environment and enjoyed good margins, too. However, the latest scenario has raised concerns on their sales and profit margins.

Price hikes taken by the companies to pass on the higher costs are, on one hand, likely to impact demand and hence, volume growth, said analysts. The strong high double-digit growth in volumes seen earlier may be difficult now, they added.

“CGDs’ margins are likely to remain subdued sequentially, adversely impacted by the sustenance of higher spot LNG (liquified natural gas) prices in 1QFY23, despite price hikes by companies,” said analysts at Motilal Oswal Financial Services.

For Mahanagar Gas Ltd and Indraprastha Gas Ltd, which derive higher contributions from the sale of CNG (compressed natural gas), increase in prices may hit their volume growth while volatility in blended gas prices means uncertainty on the margin front.

The June quarter performance of Gujarat Gas will be affected by weak industrial PNG (piped natural gas) volume and moderation in margins on pass-through of lower spot LNG price, said Abhijeet Bora, research analyst for oil and gas at Sharekhan.

For Gujarat Gas, industrial gas supplies hold importance. Current high gas prices leading to lower offtakes by industrial units is a key concern for the company.

For Gail (India) Ltd, news flow on lower gas supplies from Russia proved to be a sentimental negative, said Avishek Datta, an analyst at Prabhudas Lilladher.

Most analysts, however, expect the current scenario of lower supplies from Russia to be temporary. Further, Gail has long-term supply contracts with the US and many other sources. All companies with long-term contracts will stand to gain in the current volatile environment, said analysts. Analysts are optimistic about gas supplies from Russia to India normalizing over time.

“We expect gas transmission to be better with pent-up demand, and the petchem business benefit from better utilization at the PATA plant (in Uttar Pradesh),” said Datta. “Gail has enjoyed the alignment of operational macros since the start of 2021, and we expect the macros to support it over the next couple of quarters as well,” he added.

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