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Monday, September 26, 2022

Domestic gas prices expected to nearly double soon

Domestic gas prices will likely double when the next six-monthly review, due soon, is undertaken. This was given, as Asia’s spot LNG (liquified natural gas) rates soared to multi-year summer highs due to strong regional demand and surging gas prices in European gas hubs during August, as per rating agency Icra. In fact, prices are now significantly higher than RasGas’s term LNG rates.

New domestic gas prices will be effective 1 October. Prices are fixed based on international rates – volume-weighted average of US Henry Hub, UK NBP, and Japanese Crude Cocktail prices, among others.

Icra’s report suggests that prices in Henry Hub rose to $4.2 per mmbtu (million British thermal units) in August from $2.4/mmbtu in April, fuelled by strong exports and a heatwave in the US. Inventories in the US and Europe have continued to decline, contributing to the surge. US natural gas inventories were at about 2.8 tcf (trillion cubic feet) in July, 6% lower than the past five-year average for this time of the year. European gas inventories are at their lowest for this time of the year.

Back home, prices for domestically produced gas was fixed at $1.79 per mmbtu for 1 April to 30 September. Notably, domestic prices have been trending lower since 2019 – from $3.69 per mmbtu during the first half of FY19. 

With the trend likely to reverse now, city gas distributors have started raising prices.

Gujarat Gas raised prices by up to 15% for piped natural gas, while Indraprastha Gas Ltd also hiked rates. These operators, benefitting from strong demand for cleaner and cheaper fuel, can easily pass on the increased costs. 

Their profitability will likely remain intact going ahead, said Yogesh Patil, research analyst at Reliance Securities. Gujarat Gas has completely passed on the price increase to PNG (piped natural gas) industrial consumers and is likely to maintain Ebitda per scm of more than 6 in 2QFY22, Patil said. FY21 had seen Ebitda per scm at similar levels.

As outlook for gas utilities remains firm, experts believe the prices may eventually cool down.

Going forward global LNG liquefaction capacity additions would outpace demand growth which would exert pressure on prices, say analysts at Icra.

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