Low gas prices would help in supporting the LNG pooling mechanism, and therefore, offer an excellent opportunity for a revival in consumption growth from these sectors, says Religare Capital Markets in a research note
There is an unusually positive alignment in the fundamentals of gas companies across the natural gas value chain, which may benefit the players in the sector. These are low global natural gas prices, favourable government policies, a surge in liquefied natural gas (LNG) regassification capacities, and a more positive role for Petroleum and Natural Gas Regulatory Board (PNGRB)’s role as suggested by recent court verdicts. Religare Capital Markets Ltd says it find a strong rationale for long-term investment in the sector, which has stocks like GAIL, Petronet LNG, Indraprastha Gas (IGL), Gujarat State Petronet (GUJS) and Gujarat Gas (GGAS).
The Religare research note sees revival in gas demand from price-sensitive segments, support from government policies, better prospects for pipeline and LNG infrastructure and improving clarity on RNGRB's role as the main reasons behind its rationale.
"Spot LNG prices have declined to less than $4.5 per million British thermal units (mmbtu), making it viable for price sensitive segments such as power generation and industrial applications using liquid fuel. While these prices may not sustain, global oversupply in LNG will ensure it remains competitive against alternate fuels," the report says.
Traditionally, demand for natural gas in India has been primarily driven by the power and fertiliser sectors. Since these sectors are regulated by the government, gas consumption is not purely a function of free market principles and hence is extremely price sensitive –especially for power generation. Low gas prices would help in supporting the LNG pooling mechanism, and therefore, offer an excellent opportunity for a revival in consumption growth from these sectors, Religare added.
According to Religare, the crash in global gas prices presents one of the best opportunities for the government to bring gas-based power plants out of the woods. At an LNG price of $5 per mmBtu ($4.5 per mmBtu on 25% blending with domestic gas), power tariffs would work out to about Rs4 per unit. "While this is still above the average Rs3.5 per unit for domestic coal-based generation capacity, it makes the blended costs comfortable enough for state electricity boards (SEBs) to buy power from gas-based plants," it said.
The planned increase in LNG regasification capacities on the west coast by around 14mmtpa (or 49mmscmd) by FY2019 will remove bottlenecks in LNG import capacity. Domestic gas production might also improve by 10-15mmscmd by FY2019.
Religare says, "We expect around 25mmscmd (out of 40mmscmd) of incremental gas supplies to be absorbed by the power sector, as the government’s pooling policy strives to achieve average PLFs of 30% by FY2020 on a base of expanded power generation capacity of 38,000MW. In a way, we do not expect gas-based power generation capacities to just about survive on government support. This implies deficit in gas consumption would expand to staggering 130mmscmd levels for the power sector by FY2018. There can therefore, be only upsides to our gas consumption estimates, if prices continue to sustain at current levels."
According to Religare, some government-driven initiatives such as LNG price pooling for the power and fertiliser segments, pollution control drives through the diesel vehicle ban and the push for compressed natural gas (CNG) vehicles have led to further improvement in LNG demand. It says, "We expect most of these initiatives to continue well beyond FY17."
The research note sees better prospects for pipeline and LNG infrastructure over next few years. "Over 100 million metric standard cubic meter per day (mmscmd) of LNG regasification capacities are expected to be commissioned over five years. Since most of these would commission on viability from long-term contracts, they offer gas supply certainty," it said.
Religare says limiting PNGRB’s role to setting bid guidelines and ensuring fair play in current operations is the need of the hour. The Supreme Court verdict in favour of IGL has set the ball rolling for more investments in the city gas distribution (CGD) business across the country. A similar ruling on tariffs for GAIL’s pipelines – after being slashed by an average of 60% over the last four years due to the regulator’s heavy-handed intervention – will ensure a strong revival in investment sentiments for cross-country natural gas pipelines, the report added.