Gas price revision – Decoding the likely impact

Ruchi Agrawal
Moneycontrol Research

With rapidly increasing global crude oil prices, the prices of natural gas at various international hubs, which form a part of India’s domestic gas price calculation, have seen an uptick in the last few months. As a result, there is a strong expectation that the prices of gas in the domestic market would be revised upwards in the upcoming bi-annual revision for the October 2018-March 2019 period. This would be the third consecutive hike in gas prices in the past three years. Gas price was last hiked to $ 3.06 per million British thermal units (mmbtu) for April-September 2018 from $ 2.89 per mmbtu in the previous six months.

How gas price is calculated in India

Since November 2014 gas prices in India are determined by a formula suggested by the Rangarajan committee, based on the prices and volumes consumed at four major international hubs, namely US (Henry Hub), Canada (Alberta), Russia (Federal tariff of Russian government) and Europe (national balancing point).

Natural gas prices have seen an uptick in the last six months at these hubs. Given the upward movement in these prices, there is a strong expectation that there could be a steep price uptick in the upcoming bi annual domestic gas price revision cycle which is scheduled to be announced on 28^th September. Expectations are of around a 14 percent uptick which could take the revised price to around $3.5 per mmbtu.

Impact on companies

Any increase in the prices of natural gas could have a visible impact on associated sector companies. While the move might be positive for upstream oil and gas companies with improved per unit realisations, it might strain margins and working capital requirement of downstream gas marketing players, fertilizer companies, tile and power companies and logistics operators. The next direct impact would be for end consumers of these goods and services who might witness the price hike being passed on, leading to more expensive CNG, piped gas, electricity, tiles and fertilizers.

What it means for downstream gas companies

An increase in the natural gas prices would mean uptick in input costs for the gas marketing players like IGL (Indraprastha Gas), MGL (Mahanagar Gas), GG (Gujarat Gas). While in the longer term these companies would eventually pass on the increase to the end users by hiking the prices of CNG and piped gas, thereby keeping the margins more or less intact, in the short term, the move might strain the margin and working capital requirement.

Outlook

Owing to policy support, high demand and pollution concerns, IGL was successfully able to pass on the price increase to end users in FY18, while MGL and GG saw an impact on margins with limited pricing power in a few months amid elections. However, lately both GG and MGL have been able to take adequate price hikes, whereas IGL saw limited price uptick and some impact on margin thereby.

With upcoming elections in Madhya Pradesh, Chhattisgarh, Mizoram, Rajasthan, Telangana along with the general elections scheduled next year, we believe gas marketing companies might not have enough pricing control, and an uptick in natural gas prices could have an impact on their margins in the short term.

However, we believe with growing demand and environmental concerns, the companies would eventually pass on the higher cost. This would mean higher prices of CNG, which would impact the already widening hole which higher crude oil prices have created in customers’ pockets.Follow @Ruchiagrawal

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