“A three-pronged deficit in oil markets (inventory, capex and spare capacity) combined with an increase in domestic gas production after nearly a decade of declines sets the stage for a super profitability cycle,” said Morgan Stanley in a note.
Gas represents 58% of ONGC’s domestic gas production and every $1 per mmBtu change in gas price affects ONGC’s profits by 5-8%. “We expect earnings to increase by $3 billion in FY23 (April 2022 to March 2023) and, more importantly, improve ROCE to over 20% after more than a decade” , did he declare.
Gas prices for difficult fields (deep water, ultra-deep water, and high-pressure, high-temperature areas) increased by $3.8 per mmBtu to $9.9 and will be applicable to ONGC production from KG-DWN-98/2, which is expected to contribute approximately 14% of national gas production by FY24.
Reliance’s gas production from its offshore KG-D6 field reached 18 million standard cubic meters per day, which is expected to increase to 27 mmscmd by FY24 (March 2024), with a rise in production power from new and existing clusters.
“We expect earnings to increase by $1.5 billion with higher gasoline prices in F23,” he said.
Morgan Stanley predicted a further 25% rise in the next review scheduled for October 2022, as tight supplies keep four global benchmark prices high.
India sets domestic gas tariffs based on a formula using prices from the previous 12 months at global gas hubs NBP, Henry Hub, Alberta and Russia Gas.
In a note, the IIFL said that despite the price revision, domestic gas prices are 45-50% lower than the landed prices of imported LNG. “Political will be tested in 2HFY23 (October 2022 to March 2023), when a similar price rise is expected.”
Rising gas prices bode well for ONGC, OIL and Reliance, which account for the bulk of domestic gas production in India.
Hetal Gandhi, director of Crisil Research, said that with improved investment in production infrastructure, locally produced gas currently helps meet almost 50% of annual domestic demand. Based on an allocation system followed by the government, the distribution sector of town gas (including CNG and domestic PNG), fertilizers and electricity are the main beneficiaries of domestic gas.
“The hike is expected to impact Town Gas Distribution (CGD) entities as it will drive up domestic prices for CNG and natural gas piped to kitchens. We do not expect substantial demand erosion in the transport sector as CNG will remain competitive against We also expect domestic PNG to remain competitive against domestic LPG despite any price increases However, CGD entities margins will be significantly affected, contracting by 300 basis points in fiscal year 2023,” he said.
Rising petrol prices will also inflate the government’s fertilizer subsidy bill from Rs 14,000 crore in the last fiscal year which saw a significant increase.
“The rise, which comes at a time when relations between Russia and Europe on gas supply have deteriorated, will be controllable for natural gas prices and, therefore, the imported part of the fuel, which has an impact on sectors such as industrial PNG, refineries and petrochemicals,” he added.
The IIFL said the fertilizer subsidy will increase, while gas-based power generators risk being mothballed unless power boards buy the expensive electricity (variable cost of 4 rupees per unit).
“Although to remain neutral on margins, CGD companies need to raise CNG prices by 12-14 rupees per kg, increases to us are likely to be gradual,” he said, adding that even after this increase , CNG will be cheaper than diesel/petrol. 35 to 50%, based on operating costs.
The higher achievement for difficult fields should encourage operators, such as Reliance and ONGC, to accelerate their deepwater production schedules, the IIFL added.