The cut in prices of domestically produced gas augurs well for companies such as GAIL as well as natural gas end-users including power, fertilizers and sponge iron companies, as it decreases the cost of manufacturing of urea, petrochemicals and power, which use natural gas as a feedstock, said analysts.
However, they said, the impact on city gas distributing (CGD) companies is neutral since they will lower prices 3-4 per cent to pass on the benefit to consumers and negative for companies such as ONGC and Oil India. The government has reduced the domestic natural gas price, APM and high pressure, 12.5 per cent and 9.5 per cent, respectively, applicable for the October 2019-March 2020 period.
“We see 2.5 per cent and 5 per cent reduction in FY20 and FY21 earnings for ONGC and Oil India and an increase of 1 per cent and 1.5 per cent for GAIL,” said Harshvardhan Dole, analyst, IIFL Securities. “Separately, gas-based independent power producers such as NTPC should witness 5-6 per cent decrease in their overall cost of generation.”
The gas price for locally produced fields has been revised to $3.23 per mmBtu from $3.69 per mmBtu, resulting in a 12.5 per cent decrease, and the ceiling price for gas to be produced from difficult fields has fallen to $8.43 per mmBtu from $9.32 per mmBtu, resulting in a 9.5 per cent decrease.
“A 12.5 per cent fall in natural gas prices augurs well for natural gas end users as it decreases the cost of manufacturing of urea and petrochemicals where natural gas is used as a feedstock,” said Urvisha Jagasheth, research analyst, CARE Ratings. “Decrease in price of natural gas will also be beneficial for the margins of the power sector and sponge iron industry where it is used for the generation of energy.”
Out of the 31 urea plants in India, 28 use natural gas as a feedstock, which accounts for 80 per cent of the raw material cost for urea manufacturing. “As per our estimates, a 12.5 per cent fall in natural gas prices could potentially lead to a 6 per cent decrease in the cost of production of urea, thus decreasing the working capital intensity of fertilizer manufacturers,” said Jagasheth of CARE Ratings.
India is heavily dependent on coal-fired power plants for power. Natural gas accounts for only 3-4 per cent of the total power generated. Thus the decrease in price will not provide a major relief to the power sector, according to analysts. The power sector is grappling with inadequate availability of natural gas.
