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The coming gas supply squeeze
The continuing problems at Reliance KG-D6 will lead to a drop in India’s domestic
gas output over FY11-13. While higher LNG imports will offset this, demand will
rise much faster leading to +50% rise of the supply deficit to 66mmscmd by FY13
putting pressure on operating rates and cashflows for user industries. LNG
importers like PLNG (O-PF) are well placed; longer term domestic resource owners
like Reliance (BUY), ONGC (O-PF) should also benefit as domestic gas prices rise.
Domestic gas production will drop over FY11-13
q With Reliance indicating that it may not be able to bring additional wells online over
the next 2-3 years, we expect KG-D6 gas output to continue to drop over FY11-13.
q We now model output falling from 56mmscmd in FY11 to 47/43 in FY12-13.
q With ONGC’s production also dropping after three years of growth, the outlook for
domestic gas output is dire – the rise in JV and Oil India output, notwithstanding.
q We model gas output in India falling at a 3% Cagr over FY11-13 to 134mmscmd.
LNG will offset; overall supplies will rise at a ~5% Cagr
q LNG will offset this with imports rising from 32mmscmd in FY11 to 59 in FY13.
q We expect both PLNG-Dahej (10mtpa) and Shell-Hazira (~3.5mtpa) to run near
capacity while imports at Dabhol (2mtpa from FY13, 5mtpa later) will also help.
q The share of LNG in overall supplies will rise from 18% in FY11 to +30% by FY13.
q Nonetheless, we expect overall supplies to rise at just at a 5% Cagr over FY11-13.
Demand growth will be much faster; surge in power capacity
q We calculate latent demand at 219mmscmd implying a deficit of 43mmscmd.
q This latent demand will rise at a 9% Cagr over FY11-13 as additional capacities in
power, feedstock revamps in fertilisers and growth in other sectors like city gas.
q Notably, India’s gas based power capacity will rise +50% or 8,900MW by FY13
while several fertiliser units will be ready with revamps and feedstock conversions.
q These projects, primarily debt funded, will have cost US$7.7bn while another
~U$4bn of projects in these sectors should come onstream soon thereafter.
Supply deficit will double; user-industries will suffer
q We expect the supply deficit to increase 50% to ~66mmscmd by FY13. This will rise
further to +100mmscmd by FY15 even as new supplies come onstream.
q While the new user-side projects face an uncertain medium term outlook, existing
units may also be impacted if the government cuts allocations pro-rata to all users.
q Indeed, the race to complete power projects by Mar-12 is guided by this hope.
q Poor utilisation levels, substitution with higher priced LNG will put pressure on
cashflows and the balance sheet for most of these debt heavy projects.
q R-Power, Torrent, GMR, Lanco and GVK are in the midst of large capacity additions.
PLNG well placed; gas price hike a long term positive for Reliance
q The supply squeeze bodes well for PLNG where we see greater visibility on
volumes, potential for trading gains and greater control over the regas charge.
q We see limited growth in gas transmission volumes for Gail (O-PF) and GSPC (N-R)
in the context of poor supply growth; this dilutes their key investment thesis.
q Longer term, we anticipate the rising supply deficits to lay the groundwork for
higher gas prices; this augers well for Reliance (BUY), ONGC (O-PF), Oil (BUY).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The coming gas supply squeeze
The continuing problems at Reliance KG-D6 will lead to a drop in India’s domestic
gas output over FY11-13. While higher LNG imports will offset this, demand will
rise much faster leading to +50% rise of the supply deficit to 66mmscmd by FY13
putting pressure on operating rates and cashflows for user industries. LNG
importers like PLNG (O-PF) are well placed; longer term domestic resource owners
like Reliance (BUY), ONGC (O-PF) should also benefit as domestic gas prices rise.
Domestic gas production will drop over FY11-13
q With Reliance indicating that it may not be able to bring additional wells online over
the next 2-3 years, we expect KG-D6 gas output to continue to drop over FY11-13.
q We now model output falling from 56mmscmd in FY11 to 47/43 in FY12-13.
q With ONGC’s production also dropping after three years of growth, the outlook for
domestic gas output is dire – the rise in JV and Oil India output, notwithstanding.
q We model gas output in India falling at a 3% Cagr over FY11-13 to 134mmscmd.
LNG will offset; overall supplies will rise at a ~5% Cagr
q LNG will offset this with imports rising from 32mmscmd in FY11 to 59 in FY13.
q We expect both PLNG-Dahej (10mtpa) and Shell-Hazira (~3.5mtpa) to run near
capacity while imports at Dabhol (2mtpa from FY13, 5mtpa later) will also help.
q The share of LNG in overall supplies will rise from 18% in FY11 to +30% by FY13.
q Nonetheless, we expect overall supplies to rise at just at a 5% Cagr over FY11-13.
Demand growth will be much faster; surge in power capacity
q We calculate latent demand at 219mmscmd implying a deficit of 43mmscmd.
q This latent demand will rise at a 9% Cagr over FY11-13 as additional capacities in
power, feedstock revamps in fertilisers and growth in other sectors like city gas.
q Notably, India’s gas based power capacity will rise +50% or 8,900MW by FY13
while several fertiliser units will be ready with revamps and feedstock conversions.
q These projects, primarily debt funded, will have cost US$7.7bn while another
~U$4bn of projects in these sectors should come onstream soon thereafter.
Supply deficit will double; user-industries will suffer
q We expect the supply deficit to increase 50% to ~66mmscmd by FY13. This will rise
further to +100mmscmd by FY15 even as new supplies come onstream.
q While the new user-side projects face an uncertain medium term outlook, existing
units may also be impacted if the government cuts allocations pro-rata to all users.
q Indeed, the race to complete power projects by Mar-12 is guided by this hope.
q Poor utilisation levels, substitution with higher priced LNG will put pressure on
cashflows and the balance sheet for most of these debt heavy projects.
q R-Power, Torrent, GMR, Lanco and GVK are in the midst of large capacity additions.
PLNG well placed; gas price hike a long term positive for Reliance
q The supply squeeze bodes well for PLNG where we see greater visibility on
volumes, potential for trading gains and greater control over the regas charge.
q We see limited growth in gas transmission volumes for Gail (O-PF) and GSPC (N-R)
in the context of poor supply growth; this dilutes their key investment thesis.
q Longer term, we anticipate the rising supply deficits to lay the groundwork for
higher gas prices; this augers well for Reliance (BUY), ONGC (O-PF), Oil (BUY).
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