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The final report on gas pooling has not recommended pooling mechanism for natural gas at the
overall level. However, the pooling will be effectively be carried out at the customer end and
outlook for LNG imports remains very robust in our view. Petronet LNG remains a structurally
positive story and we reiterate Buy.
As per Indiapetro website, the final report of the inter-ministerial committee on policy for
pooling of natural gas prices and pool operating guidelines has not recommended pooling
mechanism for natural gas at the overall level, nor has it recommended a price pooling on
sectoral basis. However, this would not in any way reduce the demand for imported LNG in
our view as the committee recommendations would result in continuation of the current policy
of gas pooling at the customer end.
The committee has opted for preferential treatment on a scheme of priority as a basis for
allocating domestic natural gas across users. Thus, only priority customers (fertilizer, power,
CGD/CNG) would be allocated domestic natural gas. The preferential allocation to each
customer within these industries will have to be done by the concerned administrative
ministries. Given that demand from each of these sectors is increasing and is likely to be well
above domestic gas supply, each customer in these industries would end up pooling gas
prices by relying on imported LNG to fill in the gap. In effect, the proportion of LNG to total
gas demand will keep on increasing with incremental demand being met largely from LNG.
The committee has projected that of the fertilizer sector’s total consumption, imported LNG
will amount to 21-22%, while that for the power sector, the share of LNG will be around 25-
27% by FY17. This assumes that domestic gas supply rises from 133mmscmd currently to
189-199mmscmd by FY17.
Given the large gap between domestic demand and supply of gas, the import of LNG is
inevitable in our view. The only way to make this LNG (price range US$10-15/mmbtu)
affordable would be to pool this supply along with the supply of cheaper domestic gas
(US$4.2-5.5/mmbtu). This pooling could be institutionalized at the country level or would
automatically be implemented at the customer end. The latter option is what has been
happening in actual practice and the committee has in effect, recommended continuation of
the status quo.
Since LNG imports are inevitable in our view, Petronet LNG remains a strong structurally
positive story and we reiterate our Buy rating (target price Rs190). The committee forecasts
LNG imports to rise from 46mmscmd presently to 103mmscmd by FY17.
The committee recommends that the ultimate users should have a choice to either source
their own supply of LNG or depending on their present suppliers to give them gas at blended
domestic and LNG prices. We believe that existing suppliers (Petronet, GAIL, GSPC, BPCL,
IOC) would continue to maintain their customer relationships as ultimate users have yet to
build any expertise on global LNG sourcing.
For determining gas prices for domestic supply, the committee recommends arriving at an
inferred price by taking the average of the 12-month trailing Henry Hub price and the Asian
LNG price. On the basis of this inferred price (currently close to US$9/mmbtu), the
government should then set a premium or discount, depending on extant conditions on what
the perception is with regard to it being: (a) adequate for attracting investment in the E&P and
(b) not excessive for the consumer. This recommendation is unlikely to have any immediate
impact as domestic gas prices are likely to be revised only in 2014 when the pricing for KGD6 block is up for review.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The final report on gas pooling has not recommended pooling mechanism for natural gas at the
overall level. However, the pooling will be effectively be carried out at the customer end and
outlook for LNG imports remains very robust in our view. Petronet LNG remains a structurally
positive story and we reiterate Buy.
As per Indiapetro website, the final report of the inter-ministerial committee on policy for
pooling of natural gas prices and pool operating guidelines has not recommended pooling
mechanism for natural gas at the overall level, nor has it recommended a price pooling on
sectoral basis. However, this would not in any way reduce the demand for imported LNG in
our view as the committee recommendations would result in continuation of the current policy
of gas pooling at the customer end.
The committee has opted for preferential treatment on a scheme of priority as a basis for
allocating domestic natural gas across users. Thus, only priority customers (fertilizer, power,
CGD/CNG) would be allocated domestic natural gas. The preferential allocation to each
customer within these industries will have to be done by the concerned administrative
ministries. Given that demand from each of these sectors is increasing and is likely to be well
above domestic gas supply, each customer in these industries would end up pooling gas
prices by relying on imported LNG to fill in the gap. In effect, the proportion of LNG to total
gas demand will keep on increasing with incremental demand being met largely from LNG.
The committee has projected that of the fertilizer sector’s total consumption, imported LNG
will amount to 21-22%, while that for the power sector, the share of LNG will be around 25-
27% by FY17. This assumes that domestic gas supply rises from 133mmscmd currently to
189-199mmscmd by FY17.
Given the large gap between domestic demand and supply of gas, the import of LNG is
inevitable in our view. The only way to make this LNG (price range US$10-15/mmbtu)
affordable would be to pool this supply along with the supply of cheaper domestic gas
(US$4.2-5.5/mmbtu). This pooling could be institutionalized at the country level or would
automatically be implemented at the customer end. The latter option is what has been
happening in actual practice and the committee has in effect, recommended continuation of
the status quo.
Since LNG imports are inevitable in our view, Petronet LNG remains a strong structurally
positive story and we reiterate our Buy rating (target price Rs190). The committee forecasts
LNG imports to rise from 46mmscmd presently to 103mmscmd by FY17.
The committee recommends that the ultimate users should have a choice to either source
their own supply of LNG or depending on their present suppliers to give them gas at blended
domestic and LNG prices. We believe that existing suppliers (Petronet, GAIL, GSPC, BPCL,
IOC) would continue to maintain their customer relationships as ultimate users have yet to
build any expertise on global LNG sourcing.
For determining gas prices for domestic supply, the committee recommends arriving at an
inferred price by taking the average of the 12-month trailing Henry Hub price and the Asian
LNG price. On the basis of this inferred price (currently close to US$9/mmbtu), the
government should then set a premium or discount, depending on extant conditions on what
the perception is with regard to it being: (a) adequate for attracting investment in the E&P and
(b) not excessive for the consumer. This recommendation is unlikely to have any immediate
impact as domestic gas prices are likely to be revised only in 2014 when the pricing for KGD6 block is up for review.
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