At a time when crude is tra-ding above $110 a barrel level, and its derivative naphta is quoting higher than natural gas prices, it is likely that gas players are bound to benefit. The demand for natural gas has jumped enormously over the past few years not just because it is clean; it is also cheap.

Gas-producing companies, such as Reliance Industries, ONGC and Oil India, have seen a drop/flat growth in natural gas production, and to meet the shortfall, gas distributors such as Gail and its subsidiary, Petronet LNG, are looking at various sources to import liquefied natural gas (LNG) into India (LNG is then reconverted into gas).

Gas producers are selling natural gas from Krishna-Godavari fields at $4.2 mmBtu (million metric British thermal unit) as fixed by the government. International spot natural gas prices are hovering at $14-15 mmBtu. Natural gas prices for other domestic fields are nearly $5-$7 mmBtu. However, gas producers are not incurring losses because experts say it costs below $2 mmBtu to produce domestic gas.

For gas distributor Gail, though volumes have declined or remained flat, end users are ready to pay until prices are cheaper than naphta, which will be unless crude prices see a drastic fall. There are coal shortages too.

Dipen Shah, senior vice-president, private client group research, Kotak Securities, said, “At present, demand for natural gas is running ahead of supplies and the gap is expected to further increase over a period of time. Even present imports are unable to meet the desired demand because we don’t have such capacity for re-gasification (to convert LNG into gas). Since end users are short of fuel, they are ready to pay higher prices till its substitute, naphta, remains dearer.”

Shah pointed out that, although, international spot gas prices are trading at $14-15 mmBtu, Petronet LNG, the largest importer of LNG in India, is procuring imported gas at lower prices due to its arrangements with various sources.

Gail is likely to increase capacity from 175 million metric standard cubic metre per day (mmscmd), which is 120 mmscmd at present, to 340 mmscmd over the next three-four years. ONGC will start working on 15-16 new blocks.

Demand for natural gas remains robust. More than half of natural gas demand comes from the power and fertiliser sectors. India, right now, imports nearly 25 per cent of its natural gas requirements, including LNG. As supplies are limited, there is likely to be a rise in imports.

Limited supplies

Reliance Industries has produced a total of 436.40 bcf (billion cubic feet) of gas from KG-basin (D6) in the nine months ending December 31, 2011, which was 21.90 per cent lower than 558.50 bcf it produced in the same period in the last financial year. Production declined due to reservoir complexities and higher-than- envisaged water ingress in the fields. Production from RIL’s Tapti fields also declined 23 per cent for the period. (35.31 cubic feet equals a cubic metre).

Health check-up

Gas companies have reported better-than-expected results for the December quarter. However, shares of these companies have been under pressure on expectations that the government may cap their marketing margins. Although, many experts believe this is unlikely.

“Gail reported third quarter profits of Rs 1,090 crore, ahead of our and Street’s estimates, with better-than-expected performance from the petrochemical segment and better margins. Gas volumes were stable,” said Pradeep Mirchandani of JP Morgan in a note.

For the quarter, Gail brought four LNG cargoes and the company expects to bring in a similar number for the March quarter as well. “Gail’s long-term growth prospects appear intact, but, we remain concerned over the medium term, due to likely underutilisation of its transmission network,” said Harshad Borawake, an analyst with Motilal Oswal Financial Services.

Petronet LNG’s results were also healthy. “Results were above our and the Street’s estimates at the bottom line, mainly due to higher volume growth of 7.3 per cent to 144.9 trillion British thermal units (tBtu) during the quarter,” said Dhaval Joshi, research analyst at Emkay Global Financial Services. Indraprastha Gas (IGL) registered a year-on-year 45 per cent rise in its top line. CNG (compressed natural gas) volumes increased 16.10 per cent on year-on-year basis to 179.8 m/kg. IGL recently has raised CNG prices by Rs1.75-2 per kg in the national capital region.

Shares of Gail India has gained 3.15 per cent year-to-date and was the top performer from the index. Oil India, Petronet LNG and ONGC gained 1.85 per cent, 1.73 per cent and 1.19 per cent, respectively. Gujarat State Petronet and RIL added 0.52 per cent and 0.20 per cent, respectively.

Global check

Recently Chevron, the second largest US integrated energy major, reported its December quarter earnings. RIL holds nearly 40 per cent. stake in Chevron’s Marcellus Shale.

“Chevron’s management remains positive on the return profile of the shale gas business. Apart from shale gas, a significant part of capex is into natural gas and LNG projects globally, indicating management view that US gas prices have bottomed out, as also evinced by natural gas rigs in use at 2003 levels. RIL will also benefit because it owns 40 per cent stake in Marcellus Shale with CVX holding the remaining. Increase in US gas price is negative for Gail as its has contracted 3.5 mmtpa of shale gas to be imported to India and are linked to Henry Hubgas prices,” said Niraj Mansingka, oil and gas analyst with Edelweiss Research.

Nonetheless, shale gas exploration is at early stages. It will take time for these companies to commence production.

Better outlook

KG-D6 gas production has been on a decline, which has impacted transmission volumes for companies such as Gail and GSPL. Prayesh Jain, AVP of oil and auto sectors at India Infoline, believes an increase in imported LNG by Petronet LNG has offset the impact to some extent. With Dabhol LNG terminal expected to commence in Q4 FY12, the Kochi terminal is likely to commence in FY13 and with Shell increasing its capacity to 5 mtpa, LNG volumes will more than offset any further decline in KG-D6 volumes.

“Commencement of production from marginal fields of ONGC and CBM fields will increase gas availability in the country over the next couple of years. Over the longer term (three-five years), we expect KG-D6 would bounce back and many more fields in the KG Basin and other high-profile discoveries to commence operations,” he said.

In terms of local gas distribution, ex­perts believe demand for CNG will continue to remain strong given the rising price differential between petrol and CNG.

amitmudgill@mydigitalfc.com