India’s natural gas supply to increase by 60% to about 150 MMSCMD till FY25 – ICRA

naturalThe demand for natural gas in India will increase to ~330 MMSCMD by FY 25, while the supply will increase by 60% to around 150 MMSCMD by FY 25, credit rating agency ICRA said.

The increase in supply will be due to the likely commencement of GSPC’s Deen Dayal block and ONGC’s KG basin blocks along with marginal increase in RIL’s KG production and other sources.

However, despite high demand, new LNG terminals will face major challenges, says ICRA in its latest update on Indian Gas Utilities Sector.

Despite high domestic demand-supply deficit, the demand for Regasified Liquefied Natural Gas (RLNG) in the country is critically dependent upon the prices of liquid fuels and global spot LNG prices, the company said.

Taking into account the latest developments in the major greenfield projects and based on relatively “firm” regasification terminals plans in India, ICRA projects regasification capacity to significantly increase from current operational capacity of 17 MMTPA to around 44 MMTPA (~155 MMSMCD) by FY 20 and around 55 MMTPA (~190 MMSMCD) by FY 25.

India consumes about 100 million tonnes (MMT) of petroleum products a year. Most of this is in the form of crude oil as the country has traditionally found international LNG prices unpalatable due to their high prices.

“The prices of long-term RasGas LNG are expected to be at materially higher level than liquid fuel prices and spot LNG prices till FY17, thereby leading to significant pressure on demand and marketing margins of RasGas RLNG in view of lower prices of liquid fuels and spot LNG.”

The marketers are expected to partially mitigate the risk by taking recourse to offtake flexibility available under the GSPA and by marketing a higher share of spot LNG, it added.

Nevertheless, in ICRA’s view, the overall marketing margins of gas marketers may get adversely impacted due to pressure on the marketing margins of RLNG.

As per ICRA study, the key challenge for the new terminals is their ability to tie up LNG supplies through long-term contracts at competitive prices and the competition faced by RLNG from liquid fuels. However, the risk related to tie up of LNG is partly mitigated by the fact that the global LNG supply demand balance is expected to ease from FY 16 onwards.

According to Mr. K. Ravichandran, Senior Vice-President and Co-Head, Corporate Ratings, ICRA,” the ability to complete the projects in a timely manner without material cost and time overrun and to tie up with the LNG suppliers as well as RLNG customers or to book the optimum capacity on tolling basis would be key risks for the regasification segment, where the competition is expected to increase significantly over the longer term”.

Due to significant competition from liquid fuels and coal, the actual consumption of RLNG could be lower than demand potential leading to significant competitive pressures in the regasification segment over the medium-term. Thus, upcoming LNG capacities may operate at relatively lower utilisation than the current utilisation of regasification capacities in the country.

Mr. Ravichandran added “ICRA believes that if many regasification terminals, as planned come on stream over the next 4-5 years, the new entrants would face significant pressure on volumes and margins as they will have to compete with the existing terminals / brownfield expansion which are more cost efficient due to lower capital intensity. Sub-optimal capacity utilisation and lower regasification margins could put significant pressure on returns and credit profile of new entrants especially in the initial few years of operations”.

Despite anticipated improvement in gas supplies over the long-term, capacity utilisation levels of some pipelines would continue to remain at sub-optimal levels in the medium term. Mr. Ravichandran said “even though the GoI has ambitious plans to double the pipeline capacity to ~30,000 km, the constrained gas availability may be a key hurdle for new pipeline projects, which require large investments. Though the GoI is willing to provide viability gap funding (VGF) for the new projects, the interest of private players may be limited in absence of much clarity on the availability of gas supplies and the anchor customers who can consume high-price RLNG”.