The recent run-up in the global prices of liquefied natural gas (LNG) is unlikely to impact demand for the fuel in India, but would affect the margins of city gas distribution (CGD) companies.
Over the past 5-6 months, LNG prices in Asia have increased by over 70%, driven by rising imports from China.
Last fiscal, after stabilising at ~$8.0-8.5/mmBtu during the ‘shoulder’ months (between May-June and September-October, when demand is the lowest), Asian spot LNG prices reached peak season price level of $10.0-10.50/mmBtu.
The spurt rode on plant shutdowns and healthy demand from Japan, Korea, India and Pakistan. With crude prices breaching $75 per barrel levels, traders see an opportunity to price LNG in lockstep with crude. Earlier, there wasn’t much correlation between crude and spot LNG prices
Over the rest of this fiscal, too, prices are expected to hold at $8-8.5 /mmBtu for non-peak months and reach $10-10.5/mmBtu during the peak season even as supply is restored from plant turnarounds and incremental liquefaction capacity of ~25 million tonne comes on stream.
In the past, higher prices have impacted LNG consumption in India, a price-sensitive market. However, things are slightly different this time around, with consumption rising 6-7% to ~20 million tonne in fiscal 2018.
“The Supreme Court’s decision banning polluting fuels such as fuel oil and petcoke for industrial use in some northern states has been favourable for LNG demand. The Gujarat High Court has also tightened norms on use of coal gassifiers by ceramic companies in Morbi and Wankaner. These moves resulted in a 20% on-year growth in LNG imports in the first half of fiscal 2018,” said Rahul Prithiani, Director, CRISIL Research
What enhances the attractiveness of LNG as an industrial fuel is its improved competitiveness compared with alternatives such as fuel oil and LPG. The regulatory push to expand CGD networks is also stoking demand.
At an average crude price of $75 per barrel, the landed cost of fuel oil and liquefied petroleum gas (LPG) is expected to be $14.3/mmBtu and $19.2/mmBtu, respectively. In comparison, at an LNG price of $9.5/mmBtu, industrial piped natural gas is expected to rule at $14.8/mmBtu.
In the medium term, LNG demand will be supported by development of gas infrastructure in the largely untapped eastern region. The government’s focus on increasing the share of gas in India’s overall energy mix, and the development of infrastructure in terms of LNG terminals and pipeline connectivity, also bode well for LNG demand over the medium to long term.
“This, however, will have a bearing on the margins of CGD companies,” said Mayur Patil, Associate Director, CRISIL Research. “Higher LNG prices, coupled with upward revision in domestic gas prices, are expected to impact the operating margins of CGD companies. Their gas costs are expected to increase 25-30% this fiscal, impacting their operating margins by ~400 bps year on year. However, absolute marketing margins are expected to be supported on account of healthy volume growth.”