Ballooning Natural Gas Supply-Demand Deficit to Fuel LNG Imports: ICRA
India's natural gas supply has been adversely impacted in 2011-12 due to fall in KG D6 production to 46.6 MMSCMD in H1 2011-12 from 55.9 MMSCMD in 2010-11. KG D6 production is likely to remain at subdued levels over the next couple of years, especially in comparison to the earlier anticipated production of 60-80 MMSCMD.
Regarding domestic gas production in the medium term, Mr. K. Ravichandran, Senior Vice-President and Co-Head, Corporate Sector Ratings, ICRA stated, "Domestic natural gas supplies are expected to increase to around 153 MMSCMD by 2014-15 from 143 MMSCMD in 2010-11. The current estimate is about 22% lower than our previous estimates of 195 MMSCMD primarily due to lower KG-D6 production and delays anticipated in commissioning of KG satellite fields."
On the demand front, despite the significantly high potential across several sectors, the realisable demand for natural gas will be a function of gas supplies in the market at reasonable price, the price competitiveness of gas as compared to alternative fuels, timely commissioning of the proposed transmission pipeline infrastructure, and regulatory initiatives in the power sector. ICRA believes that demand will increase from new customers once the bottlenecks in the trunk pipeline are cleared in the near to medium term. Overall, ICRA expects gas demand to rise to around 410 MMSCMD by 2019-20 from the actual consumption of around 177 MMSCMD in 2010-11.
Commenting on increasing domestic supply-demand gap, Mr. Ravichandran mentioned "India needs to secure additional supply of LNG on a long-term basis, especially in view of less-than-anticipated domestic supply and possible shortage of LNG after a couple of years. India's reliance on LNG is expected to increase further, which will pose significant risks in a scenario of tight LNG supply demand scenario, leading to low availability and high prices of spot LNG."
As regards gas allocation and pooling, an inter-ministerial committee has recently recommended i) preferential allotment of available domestic natural gas to core sectors, that is, fertiliser and power sectors, along with a certain amount reserved for the CGD/CNG sector, ii) cap on domestic gas allocation to certain other sectors and iii) inferred gas price to be used as benchmark for domestic gas pricing. The committee has not suggested any form of pooling at the all-India level across industries but the objective has been assumed to be served by indirect pooling at the end of consumers, with price-sensitive sectors (fertiliser/power/CGD) getting a higher share of cheaper domestic gas. ICRA believes that the policy recommendations, if accepted, will provide more clarity to gas usage mix and pricing, which in turn would help companies across industries to formulate their capital expenditure plans (capex) and future requirements of natural gas.
As R-LNG is an expensive fuel as compared to domestic gas and domestic/imported coal, it is critical for a power producer to tie-up domestic gas for a large share of fuel requirements. ICRA believes that the additional demand from power (around 32 MMSCMD by 2012-13) along with lower KG D6 production pose significant fuel supply risk for gas-based power producers over the medium term. Commenting on this, Mr. Ravichandran stated "If the recommendations of the recent Inter-Ministerial Committee are accepted and implemented by the GoI, the fuel supply risk might be partly mitigated as the new power plants could get domestic gas allocation to the extent of 60-70%". ICRA expects that levellised tariff for a new gas based power plant would be competitive in comparison to those based on imported coal, if R-LNG share as percentage of total gas requirement remains about 30-40%.
Regarding the credit outlook for ICRA-rated companies in the Indian downstream natural gas sector, most of them are in the process of implementing large capex programmes, considering that the sector is viewed to have good long-term demand prospects. While the large capex is a credit concern, track record of executing projects of a similar nature, comfortable capital structure, regulated returns and steady cash flows are the mitigating factors from the credit perspective.
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