BSH NEWS Global gas shock will come home in April

The full force of the global gas crunch will hit home in April: domestic gas prices will double, driving up costs of cooking, commuting and electricity, while increasing the fertilizer subsidy bill for the government.

An accelerated recovery in energy demand from the covid-lows coupled with inadequate supply expansion in 2021 vaulted prices to record highs, sending shockwaves through the global economy. Domestic industries are already paying higher prices for LNG imported under long-term contracts where rates are linked to crude oil and have sharply cut purchases from the spot market where prices have been berserk for months.

But the most dramatic fallout will unfold in April when the government revises the domestic price of natural gas, which industry executives and analysts expect to rise from the current $2.9 to $6-7 per mmBtu. The price ceiling for gas from deep-sea fields will rise from $6.13 to about $10, as per Reliance Industries, which is also auctioning some gas next month from a field with no price restrictions and has set a floor rate linked to crude oil that at current prices would be about $14 per mmBtu.

Domestic natural gas prices are determined every April and October as per a formula fed by price data from international hubs. April price will be based on international prices from Jan to Dec 2021.

Every dollar rise in domestic natural gas price would require an increase in the price of CNG by Rs 4.5 per kg, according to AK Jana, managing director of Indraprastha Gas Ltd. This means a CNG price hike of roughly Rs 15 per kg.

“For CNG vehicles, the cost arbitrage with petrol is currently around 55%. If petrol prices keep rising, arbitrage will be maintained. But if oil prices stop rising or fall, it will be different. If the cost arbitrage is 40% or more, the conversion to CNG may not be affected,” said Jana.

City gas companies have the dual advantage of access to cheap domestic gas and pricing freedom for CNG that enjoys lower taxes compared to the heavily taxed competing fuels like petrol and diesel helping these firms report extraordinary profit margins year after year. Absorbing some cost increase in April can impact their margin, while fully passing it on risks turning off potential customers.

Last year’s price increases – CNG rates are up Rs 13/kg, or 30%, since June in Delhi – could reduce the need for a steep hike in April, analysts say. A lower allocation of domestic gas by the government in the past five months required companies to meet the shortfall with pricey spot LNG, making price increases imperative.

“From April, the share of spot LNG may decline in the overall supply as the government is expected to fix allocation gaps, reducing the overall cost,” said Probal Sen, an analyst with ICICI Securities.

But not everybody is as sure as the domestic gas supply has stagnated while demand for it is rising with the expansion of city gas. Increasing allocation to city gas at the cost of the fertilizer sector would increase the government’s subsidy burden.

CNG vehicles are still a small share of the vehicles on the road and companies have primarily used the carrot of lower operating costs to lure petrol and diesel vehicle drivers. “We can always pass through, but that price would not work because, at the end of the day, we need to also keep in mind customer interest and customer affordability. Second, it could also, in the long run, be a challenge for us because consumers will start looking at the sudden rise in the prices and start moving away from PNG and CNG,” Suresh Manglani, the CEO of Adani Total Gas Ltd, said on an earnings call.

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