The over 40% increase in natural gas price to an all-time high of $8.57/mmbtu (metric million British thermal unit) will moderate India’s city gas consumption volume growth to 8-10% this fiscal versus an earlier projection of 20-25%, said Crisil Ratings in a note today.
Steep rise in the international prices of natural gas triggered by Russia-Ukraine war, disruption in global supplies and its impact on cost of RLNG (regasified liquefied natural gas) sourced from the international market, has multiplied the cost of gas sourcing for CGD entities, forcing them to increase CNG (compressed natural gas) and domestic-PNG (piped natural gas) prices.
The current price increase has followed a 110% increase already applicable for the first half. The administered pricing mechanism gas is supplied largely to compressed natural gas (CNG) and domestic piped natural gas (PNG) consumers, who contribute to 50% and 10% of city gas volume, respectively.
The price for the balance 40% of city gas volume- supplied to industries – have also surged and remain elevated amid the protracted Russia-Ukraine conflict. Over the past 12 months, the average price of liquefied natural gas (LNG)
contracts, benchmarked against crude oil prices, rose 45% to $14.5-15.0 per mmbtu, while spot LNG prices have surged 150% to $38-40 per mmbtu.
Naveen Vaidyanathan, Director, Crisil Ratings said, “Elevated gas prices are expected to reduce demand for industrial PNG by 10-12% this fiscal, as price-sensitive industrial consumers switch to alternative fuels such as propane and fuel oil. Demand for residential PNG, although more resilient to higher prices, may also grow a modest 2-5% as employees return to office with the Covid-19 pandemic subsiding. CNG demand is still expected to rise 25-30% on the back of an expanding network of CNG stations.
“Overall, we expect full year demand to moderate to 8-10% this fiscal amidst a surge in gas prices,” he added.
To counter, city gas distributors have been taking successive price hikes since April 2021 to manage their cost pressures. CNG prices have increased by a massive 75% as prices of competing crude oil-linked petrol
and diesel have also increased.
“This may change,” said Joanne Gonsalves, Team Leader, Crisil Ratings, adding, “City gas players may now face margin headwinds as they balance between protecting margins and driving volume growth. While we expect margins to fall from the levels of Rs 8.82 per scm (standard cubic meter) seen in the first quarter of this fiscal, however for the full year, these may still be healthy at Rs 8.0 per scm – almost flat on-year and 12% higher than the last 5-year average.”
Decent volume growth and healthy margins will drive an improvement in cash accruals this fiscal. This, along with robust balance sheets and low sector gearing of 0.1x as of March 31, 2022, will support the industry’s plans to further expand its network, especially in the newer geographic areas.
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