GAIL, PLNG to gain from higher domestic LNG demand

Spot LNG prices have dropped to $14 per metric million British thermal unit (MMBtu) due to a milder winter and relatively high inventory levels in Europe.

With a decline in prices, demand for liquefied natural gas (LNG) in India has gained momentum in recent months. LNG demand has rebounded 3.1 percent month-on month (MoM) in January, led by a demand recovery in price sensitive segments such as refining and other industries, according to a report by CLSA. Domestic LNG demand surged to 65.5 mmscmd (million standard cubic feet per day) in January.

“This was driven by a rise in LNG demand from the refinery (+6.8 percent MoM / +6.8 percent YoY), fertiliser (+6.0 percent MoM / +32.8 percent YoY), and industrial segments (+13.4 percent MoM / -47.3 percent YoY), partly negated by lower city gas (-9.9 percent MoM / -71.2 percent YoY) and power (-31.4 percent MoM / -30 percent YoY) demand,” said the CLSA report.

Spot LNG prices have dropped to $14 per metric million British thermal unit (MMBtu) due to a milder winter and relatively high inventory levels in Europe.

Why had prices spiked?

Prices had risen to highs of $45 per mmBtu in December 2022 in line with the rising global energy prices amid Russia’s invasion of Ukraine.

Europe, which is highly dependent on Russia for natural gas, was at one point struggling to meet demand due to sanctions imposed on Moscow, and was exploring options other than Russia for natural gas imports. Before the invasion, the European Union imported 40 percent of its natural gas from Russia.

However, warmer temperatures in Europe and lockdowns in China led to the downward trend in prices.

Impact on gas importers

Analysts say increase in natural gas demand in India would translate into a better quarter for gas importers — GAIL, Petronet LNG, and Gujarat State Petronet (GSPL).

Motilal Oswal maintained a Buy rating for GAIL with a target price of Rs 147, stating that the recently-approved tariff hike, LNG prices cooling off to around $12/mmBtu, and improvement in gas supply should improve performance going forward.

“The decline in LNG prices is a boon for GAIL. We expect its transmission volume to rise to 117 mmscmd in FY23-24, from 107mmscmd in FY22-23. The petrochemical plant is also running at optimum capacity currently,” said the domestic brokerage in a report.

In the third quarter, transmission volumes of GAIL had dropped to 103.7 mmscmd, while gas sales volumes were at 89.9 mmscmd.

According to a report by CLSA, higher demand should drive a volume recovery in the fourth quarter for gas players such as GSPL, PLNG, and GAIL.

“A 2 percent QoQ rise in LNG demand in 4Q-TD (fourth quarter, till date) implies a rebound in volumes of PLNG and GSPL after a sharp decline in 9MFY22-23. Gail's gas transmission volume should also recover as overall QTD gas consumption is up 1.8 percent QoQ,” said CLSA.