Oil & Gas - Christmas Gift to City Gas Distribution; Sector Update :: Edelweiss, link

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We believe the Oil Ministry's new domestic gas allocation proposal will benefit city gas distribution (CGD) companies-Indraprastha Gas (IGL), Gujarat Gas-and also GSPL, but may hurt GAIL. In a reallocation, city gas has been accorded top priority to cheap domestic gas. CNG is ~25% cheaper than diesel and ~50% cheaper than petrol. Conversion was being held back only by unavailability of cheap gas. We believe: (1) 10% increase in IGL's volumes will increase its earnings ~12%; (2) GSPL will also benefit as it has 25% stake in city gas subsidiaries and one third of its transmission volume is city gas driven. We estimate a potential 3% volume rise to enhance earnings 5%; and (3) GAIL's upcoming doubled petrochemical capacity may not be allocated cheap domestic gas as  petrochemical allocation has been cut from 3.8mmscmd to 1.5mmscmd. Arguably, the government may reduce subsidy burden to partially compensate. We recommend switching from GAIL to GSPL and IGL.

New gas allocation policy: CGD gets highest priority

As per media articles, the Oil Ministry has proposed top priority to CGD for allocation of cheap domestic gas, which is priced at almost 50% discount to spot LNG prices. According to the new allocation policy, additional requirement for CGD will be first met by imposing proportionate cuts in domestic gas, currently being supplied to sectors other than priority sectors (refineries, steel). In addition, domestic gas allocation to the petrochemical industry will be cut to 1.5mmscmd from 3.8mmscmd in FY14. Priority sectors include, CGD, plants providing inputs to strategic sectors, gas-based urea plants, power stations and gas-based LPG plants. Notably, we  believe part implementation of the above has already been underway for some time.

Allocation freeze on all sectors, except CGD and LPG

The Oil Ministry has also proposed to freeze allocation to all sectors, expect CGD and LPG, at 2013-14 supply levels due to stagnant domestic production. This implies that CGD will get infinite allocation via cuts in non-priority sectors.

LINK

https://www.edelweiss.in/research/Oil-And-Gas--Christmas-Gift-to-City-Gas-Distribution;-Sector-Update/27864.html