Nomura Expects Another Gas Price Hike In October, Demand To Take A Hit

A sharp hike in India's gas prices could be detrimental to its demand, hurting consumers such as the piped suppliers and power segment, according to Nomura.

Power segment offtake is likely to reduce significantly as gas becomes relatively uneconomical at higher prices, the research house said in an April 1 report. Higher gas prices would also lead to an increase in the government's own outlay on fertiliser subsidy as the gas cost is reimbursed to keep the fertiliser prices low, it said. “Even for city gas distributors, regular price hikes could impact conversions from relatively dirtier fuels as pricing advantage could likely reduce.”

India has raised prices of gas under the administrative price mechanism by 110.3% to $6.1 a million metric British thermal unit for the first half of the fiscal starting April. Ceiling prices of gas from high-pressure, high-temperature fields have been increased by 62%.

The revised prices, according to Nomura, are the highest ever since the new gas formula was announced, though much lower than the prices of imported LNG delivered to India. Globally, gas prices have remained at elevated levels over the past several months, initially driven by winter heating demand and recently due to the geopolitical situation in Ukraine.

Such sharp hikes in domestic gas prices, it said, may be “unpalatable for price-conscious Indian gas consumers, and we think there is a need to have another look at the domestic gas formula to introduce both a floor and a ceiling price for APM gas”.

As India's domestic APM gas formula is linked to international gas hub prices, the research house expects the domestic prices to increase further to $10-11 an mmBtu when prices are reset next in October 2022 unless the government was to tweak the formula to bring in a price cap. “The ceiling price for new domestic gas, based on alternative fuel prices, could also increase to $11-12 an mmBtu.”

GAIL (India) Ltd., Nomura said, is likely to be the “worst impacted” as its feedstock cost will increase for LPG and petrochemicals. The company uses domestic APM gas for LPG and transmission business. With both APM and gas ceiling prices seeing sharp hikes, and LNG remaining elevated, GAIL's average gas costs could rise by $3-3.5 an mmBtu in H1 FY23F.

Sector-Wise Impact

Upstream Segment

Upstream gas producers such as Oil & Natural Gas Corp. Ltd. and Oil India Ltd. are expected to benefit from the higher APM prices, and their gas segments will turn profitable in FY23, the report said. Nomura estimates that every $1/mmbtu rise in domestic gas price increases ONGC and Oil India EPS by Rs 2.7 and Rs 4.5, respectively.

An increase in ceiling price will also improve gas realisation for Reliance Industries Ltd.'s exploration and production business, Nomura said. But the overall impact could be limited as feedstock cost would increase for internal gas consumption in the refining and petrochemical segments.

City Gas Distribution

Higher gas price increases input costs for city gas distributors. But these companies have strong pricing power as the regulator has no say in the end pricing of CNG/domestic piped gas.

In the past, when gas prices have increased, CGDs have raised retail prices higher than the price hikes required to pass on the impact of gas cost increase, aiding their margins.

Nomura estimates that every $1/mmBtu gas price hike requires a nearly Rs 4.5/kg increase in CNG prices, implying a need to raise CNG prices by Rs 14-15 a kg to pass on the current gas price hikes.

But city gas distributors have already taken Rs 14-16 a kg in price hikes since October 2021 gas price revision, partly driven by the shortfall in domestic gas allocation and in anticipation of a sharp APM gas price hike, the report said.

The domestic gas allocation for the priority segment (CNG/domestic PNG), according to Nomura, is likely to be revised upwards based on H2 FY22 volumes, and therefore, the required hikes to pass on the impact of gas price hikes will be modest. Also, the sector enjoys an economical advantage due to a sharp increase in prices of alternative fuels (petrol/diesel).