Higher gas prices to benefit upstream players: CRISIL
The Cabinet Committee on Economic Affairs (CCEA) has approved the revision of domestic gas prices as per the Rangarajan Committee recommendations on June 28, 2013. "Higher gas prices to benefit upstream players but hit discoms, CGD and urea producers," says CRISIL Research.
June 29, 2013 / 14:09 IST
CRISIL Research report on gas prices impact
The Cabinet Committee on Economic Affairs (CCEA) has approved the revision of domestic gas prices as per the Rangarajan Committee recommendations on June 28, 2013. The committee, which was constituted by the Government of India to review and recommend changes in the current domestic gas pricing mechanism and the framework for Production Sharing Contracts (PSCs) in the petroleum industry, submitted its report to the Prime Minister's Office in December 2012. On January 24, 2013, the Oil Ministry, proposed the same to the Cabinet for its approval.CRISIL Research has highlighted the pricing formula of the Rangarajan Committee and assessed its impact on all stakeholders - upstream players, key end users including power, fertilisers, CGD and petrochemicals industries, as well as the Government of India. We have also evaluated the impact of these recommendations on LNG imports.Implications for upstream companies:Implementation of recommendations to enhance profitability of upstream companies and promote investments
With the implementation of the committee's recommendations, domestic gas prices are expected to increase to USD 8.4 per mmbtu from USD 4.2-5.7 per mmbtu at present. APM gas prices would be revised with effect from April 1, 2014, whereas the prices of gas produced from fields, as determined by the PSCs, will be revised as and when they are due for revision as per the contract. After the price revision, realisations of upstream companies and consequently profitability would increase significantly.Impact on downstream sectors:Rising dependence on government subsidy to escalate interest cost for urea manufacturers
The government regulates the selling price of urea, which is way below the cost of production. It reimburses urea manufacturers for the difference between the selling price and the cost of production, assuming a normative profit. Thus, an increase in domestic gas prices would have no impact on the operating profit of fertiliser players as the increased cost will be reimbursed by the government. However, delay in payment of subsidies will result in higher working capital requirement, thereby increasing the interest cost for the fertiliser manufacturers. As per CRISIL Research estimates increase in interest cost will result in 30-40 basis points decline in net profit margins of urea manufacturers, assuming other things remaining constant.Fuel cost pass through limits risk for gas based power producers
The power sector is the largest consumer of natural gas, accounting for close to 35 per cent of the total consumption in 2012-13. CRISIL Research expects the upward revision in natural gas prices to increase the variable cost of generation for utilities by around Rs. 2 per unit in 2014-15. As per our calculation, every USD 1 /mmbtu increase in gas prices would result in Rs 0.5 per unit rise in generation costs. However, this would not have an adverse impact on the profitability of generating utilities as domestic gas price increases are allowed to be completely passed through for fixed return as well as competitively bid out projects. This would increase power purchase costs for distribution utilities, which could impact power off take, particularly in low power deficit states such as Gujarat, Delhi and Maharashtra.Profitability of CGD players in Delhi and Mumbai to be hit
In the CGD sector, the share of domestic gas in total consumption is relatively low at around 50 per cent. However, the impact of domestic gas price increase would vary based on domestic gas allocation to individual CGD players. For every USD 1/mmbtu increase in domestic gas prices, input costs would increase by about 10 per cent for players operating in the Delhi / NCR (Indraprastha Gas) and Mumbai (Mahanagar Gas) regions where the share of domestic gas in total consumption is high at about 80 per cent. We believe that the profitability of these players would be impacted, since they would be able to only partially pass on the increase in cost. On the other hand, in Gujarat, where the share of domestic gas in total consumption is lower at about 30 per cent, input costs of players (GSPC Gas and Gujarat Gas) would go up marginally by 3 per cent for every USD 1/mmbtu increase in domestic gas prices.Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report. The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.CRISIL Limited . All Rights Reserved. Published under permission from CRISIL"
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