The plunge in global gas prices is credit positive for the domestic consumers in the medium-term because it will compel industrial and commercial consumers to convert from alternate fuels, ICRA said in its latest report.
Asian spot prices of liquefied natural gas (LNG) have declined to about $2 per million British thermal units (MMBtu) due to increase in supplies coupled with slow demand in wake of the COVID-19 pandemic. Nearly 29 million tons of liquefaction capacity was added in calendar year (CY) 2019 over 37 million tons added in CY2018.
"Even though LNG trade grew by the highest ever at 40 million tons in CY2019, the demand was outpaced by supply, depressing spot prices. Going forward, another 163 million tonnes of LNG capacity is expected to be added over 2020 to 2025 leading to supply outstripping demand which would continue to weigh on prices," ICRA said.
The report added that the COVID-19 pandemic is expected to drag the world GDP into 3 per cent contraction. "The timing of the recovery in the global economy is uncertain and expected to be prolonged, due to which the demand growth of natural gas is expected to remain muted over the medium term, owing to which prices are expected to remain under pressure," it said.
Besides, crude oil prices have also declined precipitously due to slump in demand on account of coronavirus outbreak which would also pressurise LNG prices, it added.
"Owing to the unprecedented supply additions, high inventories and demand destruction due to the COVID-19 pandemic, LNG prices have declined to all time low levels. Mirroring the trend in LNG prices, gas prices at various international hubs have also declined to multi-year lows. Henry Hub prices currently at around $1.5/mmbtu, reflect the excess supply despite the recent production cuts amid unprecedented demand destruction due to Covid pandemic and high inventories," said K. Ravichandran, Senior Vice-President and Group Head, Corporate Ratings, ICRA.
"While record low prices are unlikely to sustain beyond the shock of the coronavirus, the surplus of LNG supply means prices will remain subdued. From an LNG aggregators perspective low spot prices could compress marketing margins on contracted long-term LNG as consumers would pressurise for reducing delivered prices," he added.
According to ICRA, low spot LNG prices are positive from a consumer perspective, however, due to the current low demand across different sectors, most production facilities are operating at moderate capacity utilisations and accordingly consumers which have long-term LNG procurement contracts are unable to exhaust the current contracted quantities of gas and take advantage of spot gas.
With ease in lockdown restrictions and recovery in demand, consumers would be in a position to benefit from low spot prices, it said.
In case of ultra low spot prices, a key beneficiary would be domestic city gas distribution (CGD) companies who are expected to roll out networks in a large number of geographical areas (GAs) and low spot gas prices could provide compelling economics to convert industrial and commercial consumers from alternate fuels, ICRA said.
Moreover, standalone LNG dispensing stations, on which greater regulatory clarity was received recently, could also benefit from demand fillip, it added.
Additionally, in an effort towards enabling gas market and fostering gas trading in the country, the Indian government launched a natural gas trading platform - Indian Gas Exchange (IGX) on June 15, 2020. To begin with, trading has started at the physical hubs at Hazira and Dahej in Gujarat and Kakinada in Andhra Pradesh. The exchange provides six market products such as daily, weekly, fortnightly etc. The contracts traded at IGX are for compulsory physical delivery and are non-transferable.
"While a gas trading exchange would provide efficient and competitive discovery of gas prices, there are several impediments to overcome such as low domestic production vis-a-vis demand, bulk of domestic gas governed by the modified Rangarajan formula, lack of pan India trunk pipeline infrastructure, distance bases transportation tariff regime, different taxation rates across states etc," it said.
By Chitranjan Kumar
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