The low Liquified Natural Gas (LNG) prices coupled with low input cost of domestic gas will offset the income loss for distributors during the lockdown, the CARE Rating agency said in a report.
The domestic gas prices have been falling since April 2019. The prices are based on the volume and natural gas prices in the USA (Henry Hub), UK (New Balancing Point), Canada (Alberta Gas) and Russia (Russian Natural Gas) with a lag of one quarter. The price revised downward to USD 2.39/MMBtu (Metric Million British Thermal Unit) from USD 3.23/MMBtu for six months starting from April 01, 2020.
Compressed Natural Gas (CNG) entities are believed to benefit most from this. The price of diesel and petrol has not witnessed significant downward revision as the government raised the excise duty owing to the fall in revenue from other sources amid lockdown. The lower gas price will be lucrative and gas distributors will command better profitability margins.
“We believe the fall in natural gas prices (domestic and LNG) will lead to higher profit margins for the CGD (City Gas Distribution) players and would be able to compensate for the income loss,” CARE said in a report.
During FY19, the consumption of domestic gas stood at 14.36 MMSCMD (Million Metric Standard Cubic Meter Per Day) while the LNG consumption stood at around 10.91 MMSCMD. The domestic gas and LNG consumption by CGD sector stood at 16.05 MMSCMD and 13.01 MMSCMD respectively during February 2020.
Gas distributors will gain from the low LNG prices which tumbled to a record low in April this year due to the subdued demand in China owing to Covid-19. The expected rise in the supply of LNG globally will push the prices further down. Low LNG prices imply that the cost of piped natural gas (PNG), the gas supplied to industries and homes through pipelines will come down and increase profitability. Distributors who rely on spot LNG will benefit more than those who engaged in long term contracts. So, there might be an invocation of force majeure clauses or re-negotiations to bring down the price of old contracts, CARE said.
“The current situation is in favour of the gas industry,” said an oil and energy analyst on the condition of anonymity due to company’s policy.
“Government’s push on the gas-based economy, favourable regulatory regime and current headwinds for the oil industry will offset the short term impact on distributors,” he added.
The new projects are expected to face delay due to lack of workers and equipment and hence, face penalty. However, the rating agency believes that the regulatory body will provide an extension.