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130% hike in natural gas price seen in H1FY23, to stoke inflation

Thankfully, the rise in international gas prices coincided with substantial jump in domestic gas production, helping in cutting import dependency of natural gas from 55% in April-November, 2020 to 47% in the corresponding period in 2021. The city gas distribution (CGD) sector — the second-largest natural gas consumer in the country — gets cheaper domestic gas under administered price mechanism (APM) for the domestic PNG and CNG categories. For some extremely price sensitive user industries like the power sector, landed price of more than $6-8 per mbtu makes it unsustainable to continue operations.

Analysts at Jefferies estimate that the domestic gas price ceiling fixed by the government will increase from the current level of $3.2/mBtu (on net calorific value basis) to $7.3/mBtu for April-September 2022 and $8.2/mBtu for the subsequent six months.
Analysts at Jefferies estimate that the domestic gas price ceiling fixed by the government will increase from the current level of $3.2/mBtu (on net calorific value basis) to $7.3/mBtu for April-September 2022 and $8.2/mBtu for the subsequent six months.

On the back of rising global crude oil and natural gas rates, analysts expect the price of domestic gas to increase by a sharp 128% for the April-September period of the next financial year. This could inflate CNG prices and make piped natural gas costlier for households, hotels and restaurants. Power and fertiliser companies, which use gas as fuel and feedstock respectively, may also feel the pinch.

Analysts at Jefferies estimate that the domestic gas price ceiling fixed by the government will increase from the current level of $3.2/mBtu (on net calorific value basis) to $7.3/mBtu for April-September 2022 and $8.2/mBtu for the subsequent six months.

The Union government, in September, 2021, had raised the price of domestically produced gas by 62% to $2.90 per million British thermal units (mBtu) as lower production amid higher demand increased North American and European gas prices. The ceiling price for gas to be produced from difficult fields — which have higher pricing and marketing freedom — had been raised by 69% to $6.13/mBtu. These prices are on the gross calorific value basis. Domestic gas price is linked to the weighted average price of four global benchmarks (US, UK, Canada and Russia).

Domestic gas is the feedstock for compressed natural gas (CNG) and residential piped natural gas (PNG) and constitutes around 85% of gas sourcing for Indraprastha Gas and Mahanagar Gas, and about 15% for Gujarat Gas. Large hikes are seen to be required in CNG prices to pass through the rise in gas costs. “Our analysis suggests a margin neutral CNG price of 75/65 at $7.3/mbtu and83/72 at $8.8/mbtu in Delhi/Mumbai respectively vis-a-vis current prices of `66/53 in Mumbai/Delhi,” Jefferies pointed out, adding that “given higher petrol and diesel prices, CNG economics would still remain attractive at 30-50% discount to diesel/petrol at $7.3/mbtu and 25-45% discount at $8.8/mmbtu”.

Asia’s spot liquefied natural gas prices have soared to multi-year highs to more than $30/mBtu owing to strong regional demand and Henry Hub prices have risen to around $4/mBtu levels from about $2.4/mBtu in in one year. Much of the spike in European gas prices — which have shot up to $26/mBtu from $7/mBtu a year-ago — has been triggered by the delay in approval of Nord Stream 2 pipeline and lower gas inventories heading into the winter season.

Thankfully, the rise in international gas prices coincided with substantial jump in domestic gas production, helping in cutting import dependency of natural gas from 55% in April-November, 2020 to 47% in the corresponding period in 2021. The city gas distribution (CGD) sector — the second-largest natural gas consumer in the country — gets cheaper domestic gas under administered price mechanism (APM) for the domestic PNG and CNG categories. For some extremely price sensitive user industries like the power sector, landed price of more than $6-8 per mbtu makes it unsustainable to continue operations.

Domestic natural gas production increased 19.5% to 2,896.7 million standard cubic metre (mscm) in December on a year-on-year (Y-o-Y) basis, mainly due to higher production from Reliance Industries and from BP’s ultra-deep-water field in the KG-D6 Block of the Krishna Godavari basin on the east coast. The output had fallen 8.1% Y-o-Y to 28,670.6 mscm in FY21, but has subsequently increased 21.5% Y-o-Y to 25,673.9 mscm in the April-December period of the ongoing fiscal.

Production also commenced on August 31 from state-run Oil and Natural Gas Corporation’s U1B deep-water gas well located in KG-DWN 98/2 block that has an estimated peak production of 1.2 million standard cubic meter per day.

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