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Energy
Equity Research
Proposed pooling of gas prices; positive for both LNG, domestic gas
Separate natural gas pools for fertilizer and power; development of
competitive wholesale gas market over the longer term
The Inter-Ministerial Committee on policy for pooling of natural gas prices
has proposed that separate price pools be formed for fertilizer and power
sectors only, possibly for a 4-5 year term, leaving room for a de-regulated
gas market to develop for other sectors. It has also proposed that city gas
offtake of domestic gas be capped at current level. It believes GAIL is best
positioned to operate the pools as the incumbent but it is against pooling
of transportation costs. Finally it recommends migration to a competitive
wholesale gas market over the long term.
Likely higher LNG imports and potentially higher domestic prices
We estimate that the policy, if implemented, could lead to additional LNG
demand of 17-30mmscmd over FY12E-14E. Pooling may also lead to
revival of expansion plans and new projects in fertilizer and power sectors,
in our view. This could also provide an impetus to further development of
gas infrastructure. Higher demand by the pools would also mean higher
demand for relatively lower priced domestic gas and could lead to an
increase in domestic gas prices to incentivize exploration and production.
But implementation of price pools could face issues/challenges
We believe the biggest challenge in implementing this policy would be
acceptance of an average pooled price (ex-terminal) of US$6.6-US$7.4 for
FY12E-14E by the power sector without sufficient hike in power tariffs. For
fertilizers, the government subsidy would increase due to substitution of
domestic gas by higher proportion of LNG. The policy itself mentions that
variation in tax rates in different states, appropriate modifications to gas
sale agreements/framing of standardized contracts for pool participants,
concerns of domestic suppliers on price-discovery, legal challenges and
forming pool operating rules as key challenges to implementation.
If implemented, positive for LNG, gas producers and transmitters
The policy, if implemented would be positive for PLNG (Neutral) as LNG
imports may rise. Gas producers like RIL (Neutral), ONGC (Buy, CL) may benefit
from higher demand as well as from moving eventually to fully market driven
gas pricing in 4-5 years. Higher gas demand and development of gas
infrastructure would be a positive for gas transmission companies, such as GAIL
and GSPL (both Buy), and structurally positive for city gas companies
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Energy
Equity Research
Proposed pooling of gas prices; positive for both LNG, domestic gas
Separate natural gas pools for fertilizer and power; development of
competitive wholesale gas market over the longer term
The Inter-Ministerial Committee on policy for pooling of natural gas prices
has proposed that separate price pools be formed for fertilizer and power
sectors only, possibly for a 4-5 year term, leaving room for a de-regulated
gas market to develop for other sectors. It has also proposed that city gas
offtake of domestic gas be capped at current level. It believes GAIL is best
positioned to operate the pools as the incumbent but it is against pooling
of transportation costs. Finally it recommends migration to a competitive
wholesale gas market over the long term.
Likely higher LNG imports and potentially higher domestic prices
We estimate that the policy, if implemented, could lead to additional LNG
demand of 17-30mmscmd over FY12E-14E. Pooling may also lead to
revival of expansion plans and new projects in fertilizer and power sectors,
in our view. This could also provide an impetus to further development of
gas infrastructure. Higher demand by the pools would also mean higher
demand for relatively lower priced domestic gas and could lead to an
increase in domestic gas prices to incentivize exploration and production.
But implementation of price pools could face issues/challenges
We believe the biggest challenge in implementing this policy would be
acceptance of an average pooled price (ex-terminal) of US$6.6-US$7.4 for
FY12E-14E by the power sector without sufficient hike in power tariffs. For
fertilizers, the government subsidy would increase due to substitution of
domestic gas by higher proportion of LNG. The policy itself mentions that
variation in tax rates in different states, appropriate modifications to gas
sale agreements/framing of standardized contracts for pool participants,
concerns of domestic suppliers on price-discovery, legal challenges and
forming pool operating rules as key challenges to implementation.
If implemented, positive for LNG, gas producers and transmitters
The policy, if implemented would be positive for PLNG (Neutral) as LNG
imports may rise. Gas producers like RIL (Neutral), ONGC (Buy, CL) may benefit
from higher demand as well as from moving eventually to fully market driven
gas pricing in 4-5 years. Higher gas demand and development of gas
infrastructure would be a positive for gas transmission companies, such as GAIL
and GSPL (both Buy), and structurally positive for city gas companies
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