Fitch Ratings on Tuesday cut its India gas consumption outlook for the current fiscal to a growth of 5 per cent as the recent spike in domestic gas prices and high LNG rates would slow the shift to the environment-friendly fuel. The government more than doubled the price of gas from domestic fields to USD 6.1 per million British thermal unit for the six-month period beginning April 1.
“We expect natural gas consumption in India to increase by 5 per cent in FY23 (FY22 estimate: 6.5 per cent), lower from our previous estimate for 7 per cent growth, as the recent sharp increase in domestic gas prices and high LNG prices – both spot and term contracts linked to oil prices – would slow the shift towards natural gas, in our view, ”the rating agency said.
Domestic gas production meets roughly half of the current consumption while the remaining is imported in the form of liquefied natural gas (LNG). Fitch said state gas utility GAIL (India) Ltd’s earnings from its natural gas marketing segment are likely to increase due to the recent rise in spot LNG prices to levels much higher than the long-term contracted LNG from US. ”
But sustained high LNG prices would slow gas consumption growth in India, ”it noted. GAIL generally hedges most of its volume and price risk on near-term deliveries of US LNG to reduce volatility and generate positive returns. Its supply of LNG from the US is linked to Henry Hub (HH) prices, which are lower than current spot LNG rates, which are trading above USD 30 per million British thermal units (mmBtu).
“However, the remaining unhedged volume affects the company’s profitability, increasing earnings during periods of high spot LNG prices and leading to losses during times of low spot prices,” it said. This was evident in the large jump in GAIL’s gas marketing segment EBIT to Rs 19.6 billion in the third quarter of the financial year ending March 2022 (FY22) amid high spot LNG prices.
In comparison, the same segment had a negative EBIT of Rs 4.3 billion in FY21, when Asian spot LNG prices touched an all-time low of less than USD 2, due to a drop in demand amid the coronavirus pandemic-related lockdowns.
We expect GAIL’s gas-marketing segment to generate EBIT of Rs 4,000 crore in FY23 (FY22 estimate: Rs 4,300 crore), driven by our expectation of high spot LNG prices in Asia, compared to landed costs for GAIL’s HH-linked contracts, which we forecast to be USD 7-9 per mmBtu, subject to transportation costs, ”it said.
Depending on the spot LNG price differential between Europe and Asia, GAIL also has the option to sell some of the supplies from US in Europe through destination swaps. Spot prices in both Europe and Asia are high, driven by efforts by the EU to reduce reliance on Russian imports and thus competing with Asian LNG importers.
Fitch recently revised its title transfer facility (TTF) gas price assumptions to USD 20 per mmBtu for 2022 and USD 10 in 2023, reflecting the impact of geopolitical risks on demand and supply of hydrocarbons.
GAIL’s regulated gas transmission segment, which accounts for around 40 per cent of its total EBIT, generates stable returns as it is not affected by volatility in crude oil and LNG prices. However, slower growth in gas consumption would affect the expansion of gas transmission volume and, in turn, the EBIT growth for this segment, ”it said.
The rating agency expects GAIL’s financial profile to remain commensurate with its credit profile of ‘BBB’ even as stronger profitability in FY22 and FY23 are expected to lead to an increase in shareholder returns. GAIL recently said it plans to buy back up to Rs 1,080 crore of shares in April 2022