India’s energy chain is on the brink of transformation, thanks to the new mega gas discoveries in recent years. Post commercialization of RIL’s KG-D6 field in FY 10, India’s domestic gas supply has peaked by as much as 50 percent to 47.5bcm. In the decade earlier, the supply was restrained in the range of 31-32bcm. Further, the resultant rise in private sector share of gas production has reaped a bonanza of benefits - 33 per cent increase in gas-based power generation to 97BU, Rs40bn fertilizer subsidy savings and substantial drop in operating costs for industrial users.
The share of natural gas in India’s energy basket, though still lower by the world standards of 24 per cent, now stands at 12 per cent in FY10 compared to 9.5 per cent in FY 09.
There are interesting facts about natural gas:
Chinese are believed to have discovered natural gas 2500 years ago
Britain was the first country to commercialize its use
Russia has the largest deposits at 27 per cent
Italy was the first country to use it as an auto fuel in 1934
Pakistan has the highest number of CNG-powered vehicles in the world (2.3 m). India with 0.9 m takes the fourth place
Three factors are scripting a fizzing gas story for India:
Huge gas discoveries like GSPC’s Deendayal fields and RIL’s D3-D9 fields - although they are all in initial stages of development and hence supply increases would be gradual, in line with pipelines for which gas availability is imminent - else pipeline utilization levels would fetch lower returns than expected.
Establishment of a regulatory framework that promises to fuel the development of pipeline infrastructure - no wonder GAIL, RIL and others like GSPL have huge capex plans of pipeline expansion. The newly constituted Petroleum and Natural Gas Regulatory Board (PNGRB) plans to develop pipelines through competitive bidding. India is all set to add 17,000km of trunk pipeline capacity by FY16/17. This will almost quadruple the country’s gas transport infrastructure at an estimated capex of Rs400bn - 500bn over the period of FY10-17.
Gas pricing reforms - Thanks to the persistent lobbying by E&P developers, India is moving towards a pricing framework reflecting international trends rather than ad hoc pricing. This will help E&P developers to improve their cash flows that get affected by the massive capex in developing gas fields. More importantly, this will attract further investment from the private sector. The pricing formula that would be in vogue till end of 2014 is Sale price = 2.5 + (cost price -25) ^ 0.15. The pricing framework will ensure that gas consumption is consumed by sectors that can absorb market prices rather than the current system of preferential allocation to certain sectors.
Development of City Gas Distribution (CGD) networks would benefit consumers and also lower emissions. While PNG and CNG bring about cost benefits vis-à-vis LPG and petrol/diesel respectively, their ease of use, economic benefits and environmental merits are unquestionable. This makes a strong case for governmental support to this sector in the coming years.
From a stock market investment perspective, one can consider long term investments in Indraprastha Gas and Gujarat Gas, which together account for over 60 per cent of the total CGD sales in India and the only listed thematic plays in business. The conducive business environment augurs well for them with promise of at least 15 per cent annual earnings growth through FY13 and beyond. Among the allied sectors linked with the gas consumption surge, food chain companies like pipe suppliers (PSL), CNG cylinders (Everest Kanto) and gas compressors (Kirloskar Pneumatic) stand to gain in the coming years.
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