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Steep spike in global liquefied natural gas price unlikely to curb domestic demand

The regulatory push to expand CGD networks is also stoking demand.


PTI Last Updated at 05-08-2018 13:39:45 IST India
Steep spike in global liquefied natural gas price unlikely to curb domestic demand
  • Last fiscal, after stabilizing at USD 8-8.5/mmBtu during the lean months (between May-June and September- October), Asian spot LNG prices peaked at USD 10-10.50/mmBtu, said Crisil. (Image Credit: Twitter)

The steep 70 percent spike in global liquefied natural gas (LNG) price is unlikely to curb domestic demand but may crimp the margin of city gas distribution (CGD) companies to some extent as volume growth will support marketing margins, according to a report.

Over the past five to six months, LNG prices in Asia have increased by over 70 percent, driven by rising Chinese imports. The spurt was also due to plant shutdowns and healthy demand from Japan, Korea, India and Pakistan, Crisil said in a weekend note.

"But with crude prices breaching USD 75 a barrel, traders see an opportunity to price LNG in lockstep with crude. Earlier, there wasn't much correlation between crude and spot LNG prices," the report said.

It also noted that over the rest of this fiscal year, too, prices are expected to hold at USD 8-8.5/mmBtu for non- peak months and reach USD 10-10.5/mmBtu during the peak season even as supply is restored from plant turnarounds and incremental liquefaction capacity of 25 million tonnes coming on stream.

Last fiscal, after stabilizing at USD 8-8.5/mmBtu during the lean months (between May-June and September- October), Asian spot LNG prices peaked at USD 10-10.50/mmBtu, said Crisil.

"The Supreme Court banning polluting fuels like fuel oil and petcoke for industrial use in some northern states have been favorable for LNG demand. "The Gujarat High Court has also tightened norms on the use of coal gasifiers by ceramic companies in Morbi and Wankaner. These moves resulted in a 20 percent growth in imports in the first half of FY18," it said. What enhances the attractiveness of LNG as an industrial fuel is its improved competitiveness compared with alternatives like fuel oil and LPG. The regulatory push to expand CGD networks is also stoking demand.

Though in the past, higher prices dented LNG demand in the country, things are different now with consumption rising 6-7 percent to 20 million tonnes in FY18.

At an average crude price of USD 75 a barrel, the landed cost of the fuel oil and LPG is expected to be USD 14.3/mmBtu and USD 19.2/mmBtu, respectively. In comparison, with LNG ruling at USD 9.5/mmBtu, industrial piped natural gas is expected to rule at USD 14.8/mmBtu, the report said.

Crisil expects LNG demand in the medium term to be supported by the development of gas infrastructure in eastern region which is largely untapped.

Government focus on increasing the share of gas in the overall energy mix and the development of LNG terminals and pipelines, bode well for demand over the medium to long-term, it added.

"But this will have a bearing on the margins of CGD companies," warns the report, as "higher LNG prices, coupled with the upward revision in domestic gas prices, are expected to impact the operating margins."

"Their cost is expected to increase 25-30 percent this fiscal, impacting their operating margins by 400 bps. But absolute marketing margins are expected to be supported on healthy volume growth," it said.

It can be noted that despite the price spiral, the recently concluded CGD auctions have seen good demand from domestic companies, wherein the Adani group has emerged the biggest winner bagging 11 city licences, followed by Bharat Gas Resources, a unit of Bharat Petroleum, winning licences for six cities; IOC four and Gail Gas three cities.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)

COUNTRY : India

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