Why It’s Becoming Tough For GAIL To Profit By Selling Gas
A fall in prices of liquefied natural gas has made it difficult for the nation's largest gas distributor to sell the commodity at a profit in the domestic market.
GAIL (India) Ltd. buys LNG at contracted prices in the international market and sells at prevailing rates in the domestic market—a business that generates 70-75 percent of its revenue. But while selling prices have tumbled, buying prices remain high.
The Singapore liquified natural gas prices—the benchmark LNG prices for Asia—have declined more than 60 percent to $4.2 per million British thermal unit in the last six months, according to Bloomberg data. That's because of a supply glut and high inventory in North Asia.
GAIL has three active long-term LNG contracts to buy gas—two with the U.S. and one with Russia. The landed cost of U.S. LNG, which contributes more than 69 percent of its import volumes, in India is at a 25 percent premium to the Singapore spot price.
For GAIL, the contracted price is 115 percent of the Henry Hub prices—the U.S. benchmark—along with $3 per mmBtu of fixed fees and transportation charges of $1.5-2 per mmBtu. GAIL, however, has the option to mitigate this risk by either hedging or swapping or selling these contracts.
A depressed spot market may lead to losses on unhedged contracts and hurt GAIL's gas trading profits as spot prices remain well below the landed U.S. LNG prices in 2019, according to Vikash Jain, oil and gas analyst at CLSA.
Though the natural gas trading business contributes the most to GAIL's revenue, its contribution to the operating income varied depending on the pricing in the last one year. For the first nine months ended December, the trading business, on an average, contributed close to 30 percent to the total earnings before interest and tax due to favourable pricing. But that may fall in the March quarter as the cost of importing gas from the U.S. was higher than spot prices in Asia.
Shares of GAIL have declined nearly 4 percent in the last six months as the pricing differential impacted its business. That compares with the near 10 percent gain in the benchmark NSE Nifty 50 Index.
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