India gas -Govt takes a bold gas price decision :: Nomura research

Govt accepts the Rangarajan formula from April 2014; a positive
move, and could more than double domestic gas prices
The Indian government has finally acted on gas prices. The full details of
Cabinet committee on economic affairs (CCEA) meeting are not yet
available, but as per CNBC and other news channels reports:
 Govt has accepted all the recommendation of Rangarajan committee
on gas pricing. The only difference seems to be that there will be
quarterly revision (and not monthly as recommended).
 New price applicable from 01-April-2014; and valid for five years.
 The likely price is USD8.4 to 8.6/mmbtu in April 14, and this could
potential increase to over USD10/mmbtu in three years.
 Applicable to all domestic gas including APM gas, but not applicable
where prices are determined by PSC mechanism (like NELP blocks)
or where contracts provide for price indexation (like PMT).
The approved formula, in our view, would not directly apply to NELP
blocks like RIL’s KG-D6. Under the PSC mechanism, the price is market
determined and government approval is required only for formulas. But,
with the benchmark being set for domestic prices and government keen
to control price, we think any new NELP price formula would be at least
similar if not better than the Rangarajan formula.
ONGC and OIL biggest beneficiary; but, will much benefit stay?
On our estimate, each USD1/mmbtu of higher gas price raises ONGC
/OIL’s FY15 EPS by 8–9%. Thus a near doubling of price to USD
8.4/mmbtu can possibly raises ONGC/OIL’s FY15 earnings by nearly
35–40%. But, the catch is that nearly 90% of APM gas goes to the highly
price-sensitive fertiliser and power sectors, where passing on price
increases is particularly difficult. And it is unlikely, in our view, that the
cash-strapped GoI would be willing to foot the nearly USD2.8bn increase
in the gas bill for the power and fertilizer sectors.
We highlight, that when APM gas prices were raised last in June 2010 (from
USD 2/mmbtu to USD 4.2) not much benefit stayed with the upstream
producers. The effective subsidy share of upstream was increased from
near 1/3rd level earlier to nearly 40% in FY11 and FY12. Assuming that all
of the impact of a higher subsidy is passed on to ONGC/OIL, the benefits
would be rather modest at only 7–8%, in our view.
Positive for RIL: KG-D6 price revision will get easier; CBM price
also can be decided soon; no change in PMT pricing
Adoption of the Rangarajan committee recommendations paves the way
for discussion to commence on KG-D6 and CBM blocks as per the
production sharing contract (PSC) mechanism. We think a USD8 plus
price is good to attract new investments. But, we think unlikely
contractors will readily agree, and will still seek higher pricing. The
contractors have been seeking LNG import parity pricing (results in price
of USD13-15/mmbtu). The gas pricing for the Panna, Mukta & Tapti

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(PMT) fields is currently capped at USD5.57–5.73 (based on fuel price
linkages as per PSC).
On our estimates, each USD1/mmbtu increase raises RIL’s FY15 EPS
by INR1.4/share (2%). For RIL, we already model price of USD8/mmbtu
from FY15, and thus do not see much changes to our estimates.
GAIL likely worst impacted; EPS impact of ~18% to FY15F EPS
GAIL, as a user of gas (internal consumption as fuel/feedstock for
LPG/petchem production and gas transmission), would be worst
impacted. The pricing of both LPG and petchem is based on import
parity, thus we do not believe GAIL could pass on costs. For
transmission, GAIL could appeal for tariff increases to PNGRB, but tariff
reviews take time and PNGRB does not seem favourably disposed
towards tariff increases and most of its tariff orders have been harsh.
On our estimates, nearly 50% of GAIL’s gas consumption is of non-
LNG/non-PMT gas, which is priced at KG-D6 price (USD4.2/mmbtu) or
non-APM price (USD5.00–5.50). Our initial estimate indicates that GAIL’s
gas cost could increase by USD170–180mn. Assuming it is not able to
pass on any cost increase (or reduce gas costs by increasing PMT
volumes for own consumption), we see an impact of 18% to FY15F EPS.
IGL to pass on increase; not much impact on GUJS and GGAS
In our view, city gas distribution companies (CGD) would be able to pass
on all the gas price increases by raising end prices. We highlight that all
CGD companies have been able to pass on cost increases, thus would
not have much worry on this issue. We highlight that when APM prices
were increased by sharp 112% in June 2010, IGL had passed on all of
the cost increase by raising its retail CNG price by 26%. Also, we
highlight that IGL has shown tremendous ability to pass on gas cost
increases – over the past three years; it has affected 14 price increases
to raise CNG prices by nearly 100%.
APM gas comprises nearly 70% of IGL’s current CNG supply portfolio.
For each USD1/mmbtu in APM gas cost increase, we estimate that IGL
would need to increase its CNG price by INR2.4/kg. Thus, if APM gas
prices were to increase to USD8.4/mmbtu, IGL would need to increase
its CNG price by nearly INR10/kg or 24% of the current price.
Gujarat Gas: In our view, APM or KG-D6 price increases would not
have much impact on Gujarat Gas, as most of its gas is either LNG or
from PMT fields. Only a 10–15% share of its gas is from marginal fields
in Gujarat, and we think similar to IGL, it could pass on costs.
For GSPL, as it does not have any gas compression, there is only
marginal internal consumption of gas. Thus we do not see any significant
impact.
Higher prices improve sentiment and also investment climate
In our view, GoI’s decision on gas price is positive and it certainly
improves the near term sentiment. However, we think a lot more would
still need to be done.
 The Rangarajan committee recommended formula is complex and
with many variables and assumption. Timely and transparent pricing
decision each quarter would be very important.
 Also, as we highlighted, the Rangarajan committee recommended
formula would not directly apply to PSC blocks, and government would
need to work with operators to determine the pricing for each of these
blocks. This could still remain tricky as several operators have been
seeking much higher import parity price than what was recommended
by the Rangarajan committee.