Fall in LNG prices brighten scope of ₹50,000-cr investment in distribution projects

The viability of ₹50,000 crore capital expenditure planned in the city gas distribution (CGD) space over the next four years has improved with the price of liquefied natural gas (LNG) expected to be subdued during the period.

LNG accounts for nearly half of CGD consumption volume, and a lower price augurs well for both volumes and operating margins of distributors, and consequently, project returns.

Coronovirus outbreak

Spot prices of LNG have more than halved to a decadal low of less than $3 per million metric British thermal units (mmBtu) in February because of oversupply and more recently, the Coronavirus outbreak.

That has sharply improved the competitiveness of piped natural gas (PNG) compared with furnace oil, liquefied petroleum gas and gasoline, prices of which are typically linked to crude oil.

Manish Gupta, Senior Director, Crisil Ratings, said at a Brent crude price of $55 per barrel, the landed cost of furnace oil would be about $12 per mmBtu, while industrial LPG will be about $16 per mmBtu. On the other hand, industrial PNG, apart from being cleaner, is significantly cheaper at $10.5 per mmBtu, he said.

Global LNG prices are seen softer over the medium term because supply is on course to exceed demand growth, with liquefaction capacity of about 180 million tonnes – equal to 40 per cent of the current global capacity – set to be commissioned over the next four to five years. Domestically, regasification capacity, too, is expected to witness robust growth, outpacing LNG demand.

International natural gas prices

The domestic administered price mechanism-based gas, which accounts for the balance half of CGD volume, is also expected to benefit from low international natural gas prices. Typically, CGD companies pass on lower input costs to their compressed natural gas (CNG) and retail customers, and in return, receive a volume fillip owing to better price competitiveness.

The subdued outlook for LNG prices improves the viability of ₹50,000 crore of CGD capex relating to the ninth and 10th rounds of auctions by the Petroleum and Natural Gas Regulatory Board (PNGRB). It also improves the prospects for 44 new geographical areas (GAs) set to be awarded in the upcoming 11th round of auctions.

Says Naveen Vaidyanathan, Associate Director, CRISIL Ratings, said, “Returns from typical new GAs awarded may improve by about 400 basis points, enabling CGD players to achieve an internal rate of return (IRR) of 18 per cent.

This assumes incremental volumes and improved profitability over our base-case forecast, he said.

However, project risks are relatively low given players’ strong parentage (about 70 per cent of capex is by oil marketing companies and strong corporate groups), the staggered nature of capex and a favourable demand outlook.

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