Ind-Ra: Revised Domestic Gas Prices to Benefit Upstream and Midstream Gas Entities

The recent gas price increase would lead to an increase in revenue for domestic gas producers by around INR13 billion during 2HFY18, estimates India Ratings and Research (Ind-Ra). The government of India has increased domestic natural gas price by around 17% to USD2.89/mmbtu for October 2017-March 2018. Prior to this, the gas prices have been downward revised by about 50% since the implementation of the gas pricing formula in October 2014.

This is the first upward price revision after five consecutive domestic gas price reductions and has been driven by an increase in the average gas prices prevalent at the reference hubs over July 2016 - June 2017. The average Henry Hub gas prices increased by 19% to USD3/mmbtu for the current reference period of July 2016- June 2017 compared to USD2.52/mmbtu for the previous reference period of January-December 2016.

Although producers have been benefiting from lower rig and vessel rentals for renewed contracts due to soft crude prices, the operating cost remains close to realisations from its sale. Hence, this increment would bolster domestic producing companies' margins. The public sector units namely Oil India Limited and Oil and Natural Gas Corporation Limited, which contribute around 80% to the total domestic production, would be the largest beneficiaries of the price increase. Ind-Ra believes this would result in around INR13 billion higher revenue for Indian domestic producers during 2HFY18. In the mid-stream segment, Gail (India) Limited's ('IND AAA'/Stable) marketing segment could see about INR15 billion higher trading revenue from the sale of domestic gases during 2HFY18.

However, compressed natural gas (CNG) and piped natural gas (PNG domestic) end-consumers of city gas distribution (CGD) entities could bear the burden of price increase, as it is usually passed on to the customers. The revised price means CGD entities would entail INR1.05 higher cost per scm on gas procurement. The non-subsidised and subsidised LPG prices are around 33% and 9%, respectively, costlier than the domestic PNG in Delhi. Similarly, CNG is around 60% more competitive than petrol and around 50% than diesel. Given the significant competitiveness of CNG and PNG (domestic), CGD entities could raise the prices of these fuels by INR1/kg-1.4/kg and INR0.8/scm-1/scm, respectively, for customers. Considering that the pricing power lies with CGD entities, the quantum of the burden passed on to the consumers could vary across CGD entities depending on the capex and investments surplus targeted by them.

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