>INDIA GAS: Growth will hinge upon the pricing of regasified liquified natural gas (RLNG)

Shifting focus from availability to affordability

We believe India’s gas sector growth will hinge upon the pricing of regasified liquefied natural gas (RLNG) rather than being a function of the widely accepted notion of supply constraint. The sector, which set a new paradigm in the energy space on the back of domestic gas in 2010, will now be driven by RLNG until domestic supply perks up. We believe that despite the euphoria over surging domestic gas supply fading, the earnings of players in this sector are fairly intact. We assign Buy rating to Gujarat State Petronet, Petronet LNG and GAIL (India) who are direct beneficiaries of the RLNG play in India, while we have Sell rating on city gas distribution (CGD) companies such as Indraprastha Gas and Gujarat Gas Company as they
seem to be entering a phase of margin contraction.


Gradual soft pricing of LNG in the offing: We have assumed average LNG free-onboard (FOB) spot price of US$15/mmBtu for FY13E as well as FY14E compared to an average of US$16.18/mmBtu in the first nine months of FY12, implying the cost economics of natural gas will continue to be favoured by the non-core sectors. We believe the current trend of softening spot LNG prices will continue on account of companies preferring to rely more on spot/medium term cargo rather than on long term contracts due to price distortion caused by the advent of shale gas. Our interaction with industry stalwarts indicated that ~35mtpa of RLNG capacity is being withheld by suppliers as they feel current spot prices are depressed and ~8.2mtpa of
contracts will be available for renewal from 2014.


Pricing to drive medium-term consumption growth: In the wake of dwindling production of domestic gas, consumption growth will hinge upon the ability of midstream companies to source LNG at US$15/mmBtu FOB in the medium term. Our analysis reveals that gas consumption can post a 9% CAGR over FY11-16E if noncore sectors remain dependent on RLNG with the core sector continuing to rely on domestic gas. Average LNG cost of US$15/mmBtu is vital for consumption growth as historical evidence shows that this level acts as a threshold limit for oil refineries, petrochemicals and CGD companies to determine their propensity to consume natural gas or switch to other liquid fuels.


Slim chances of across-the-board limit on marketing margin: The oil ministry has asked the regulator, PNGRB (Petroleum & Natural Gas Regulatory Board) to set the quantum of marketing margin that can be charged by a gas marketer. Our interaction with PNGRB officials indicated that as per the PNGRB Act, the regulator has no legal standing to limit marketing margin unless under Section 11(a) it finds concrete evidence of profiteering, or unless natural gas gets a notified status. Upcoming gas infrastructure to allay fears of tight gas supply: Indian companies will be investing US$28-37bn in gas infrastructure over the next four-five years. With the infrastructure in place, gas supply potential over this period is expected to increase to 336mmscmd from 185mmscmd currently by FY16, of which ~40% will be accounted for by RLNG terminals.


To read full report: INDIA GAS SECTOR
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