Spot gas prices to remain between $8- $12/mmBtu until September: IGX’s Rajesh Mediratta

Mediratta said that the trend is, however, likely to reverse in the next quarter as spot prices are expected to be in the range of $10- $12 per mmBtu with winter approaching. Edited excerpts:

What is your outlook on natural gas prices?

There are two or three variables which will decide prices in the next one year. One is the weather conditions in Europe and Northeast Asia. If it is a very severe winter, the prices will go up. If it is not as serious as last year, prices may not go up. Second, is storage levels in Europe, which are at good levels. So that will mean that the prices should not be very high. Third will be the demand in China. If Chinese demand picks up, then definitely prices will go up. So far, Chinese demand is not so much. So everyone in the market expects that the prices will not go beyond $20 per mmBtu. Prices may remain at about $8 to $12 up to September, but after that it may go up to $15.

What were the reasons for lower volumes in May?

There is a price spread between the buyer and seller. Sellers expect to sell at $12-13 (per mmBtu) since they have purchased spot gas at that price as some time back prices were in that range. But now international spot prices have come down to about $8-9 (per mmBtu). So the buyer is expecting to buy at $9, but the seller is not ready to sell at $9 as they will lose substantial money. So a lot of buys and sells are coming into the market, but they're not merging.

The second problem is that the ceiling price of domestic gas which is sold by ONGC (Oil and Natural Gas Corporation) and Reliance from KG (Krishna-Godavari) Basin is about $12.10 and if someone is ready to buy that gas, there is an additional transmission tariff of $1-$1.20. So it becomes costlier. Again, there is no buyer for that gas.

The third reason is that crude oil is about $70. The option for industries is either they consume natural gas or they can use propane or naphtha. Propane and naphtha are still cheaper than natural gas. So many industries have moved to these alternate fuels because that is cheaper, and they will not come back to using gas till the time it becomes cheaper on a sustained basis. If that happens, only then they will switch.

How much volume have you handled in June so far?

Until June 20, we have handled about 6 lakh mmBtu. In this quarter, we have done about 32 lakh mmBtu, whereas last year in the first quarter we did about 47 lakh mmBtu.

Do you expect this trend to reverse in the next quarter?

Yes, it should reverse in the coming quarter. One reason is that either the price will stabilise at a higher level in the next quarter as winter sets in. There are other factors too. Sometimes small things make a big impact on prices like there was some disruption in Norway at the production site which caused a spike for a few days. It is international events that impact prices. So it is difficult to say what prices will be but the range will be something around $10 to $12.30 (per mmBtu).

A lot of times power plants are stranded because of lack of gas. Do we see a long-term sustainable plan for this?

Long-term power plant sustainability is less because prices in the Indian power market are set by coal and coal is cheaper than gas. If the price of gas doesn't come to something like $5, we will not be able to see sustained use of gas in power plants.

For four months in a year, (output from) gas power plants will be dispatchable, from May to September, as this is the peak period for India due to the summer months. Gas can be used as there can be a shortage of coal or there can be a shortage of overall resources.

Also, generally, after the monsoon recedes, hydropower is also receding during May or June. In some states like in Haryana and Punjab, the demand for water continues because they have sown paddy crops. So September and October are definitely the months when gas power plants (output) can be dispatched. The maximum we have seen for power plants using gas is about four to five months (in a year). So sustained use of gas in the power sector is still looking difficult.

The other thing is the tax implementation; Andhra Pradesh implies VAT (value-added tax) of 24.5 percent. AP power plants are not getting used because of the VAT. In AP, gas comes from the KG Basin which has a ceiling price of $12. So with $12 plus 25 percent tax, the price of gas goes up to almost $15. We have requested the AP government to reduce VAT, because then the industry within AP will also be able to use gas.

Is gas demand expected to increase? Which segment is going to drive that growth?

The CGD (city gas distribution) segment definitely will definitely drive growth. Also, the transport sector will be able to shift some of the commercial vehicles like trucks, buses and commercial passenger vehicles to CNG (compressed natural gas) because that is cheaper. And after the government launched the 11th round of CGD licences, everyone is expected to build networks within cities in two to three years' time. Some commercial entities like hospitals and hotels are expected to switch to PNG (piped natural gas); today all hotels are using LPG, except for in Delhi and Mumbai.
The fertiliser industry (a large consumer of gas) will also grow. Then other sectors like steel will also start using more gas when the cross-border adjustment mechanism is implemented in Europe, where they will apply carbon tax to all imported items. If the steel industry has utilised carbon-intensive energy, then they (Europe) will apply carbon tax. So that will push the demand for gas in the steel and aluminium industries.

Have prices been competitive on the gas price index GIXI?

GIXI represents the price at which trades are happening. So previously when international spot prices were about $15- 25, GIXI was lower than the international spot prices. Now spot prices have come down to $9. But our prices have not exactly gone below $9 as Indian sellers have bought gas at higher costs. So the range at GIXI is between $10 and $11. We are currently somewhere very close to that, but we are not at a discount to international spot prices.

We expect prices to match after the $12-13 inventory is over. New spot cargoes will come at a lower price. Then the market will match; maybe in June or July.

Do you expect more exchanges coming into the market?

No. Our volumes are yet to grow and we already have good players on board like GAIL, ONGC, IOC (Indian Oil Corporation). So I think after having GAIL and other entities, we don't see any interest in the market to get one more exchange. Adani Total is also our strategic investor; NSE (National Stock Exchange) is also listed with us. So we don't see any other players having that kind of interest to create an exchange. Because even if they create an exchange, they can take only 5 percent (of the market). For 5 percent, why should one create an exchange if they're getting the same thing here? So we don't see that happening, at least now.

Has there been any progress made with regards to the initial public offering?

No.

When are long-term contracts being launched on your exchange?

We are still discussing with our stakeholders to finalise the design aspects of the contract and we also wanted our new long-term contract to have international benchmarks like Brent, because we should give the option to the buyer and seller to use benchmarks in their contracts. If somebody wants to procure a one-year contract and he's bringing LNG (liquefied natural gas) at a price linked to Brent, he would like to sell at a price linked to Brent. We have to talk to agencies and get final consent from them because we are using their benchmarks for our contract. And then we are also designing the final part. And this will be done by this month and then we will have to file our application with PNGRB (Petroleum and Natural Gas Regulatory Board) to get approval. So two, three months on that.

What is the status of trading of pipeline capacity?

We are waiting for changes happening in the access code. A draft access code was issued by PNGRB and the final discussion/ public consultation is yet to take place. After public consultation, they will finalise it. PNGRB has given a date of June 23 for giving final comments. Then they will run a public consultation, and then they will decide. By July end, probably they will be able to complete this process. However, implementation will take some time as after they issue the order there will be some changes required at the transporters’ end. So maybe they will give three months' time for implementation.