Dazzling future of the Natural Gas Sector in India and happy days ahead for companies in its orbit
“Apna time aagaya!!” is what the Natural Gas Sector seems to be shouting from the rooftops.
A series of events and compulsions have come together to put this sector in the spotlight…making it a single solution to various current day problems in the country.
Our research desk has pieced together various domestic and international facets of this knight in shining armour and presented us with a compelling tale of a sector whose time has come. Take a look…
Single remedy for two ailments
The share of natural gas in India’s energy mix is one of the lowest in the world, which is impacting India in two ways – (i) Higher pollution level and (ii) Concentration risk on coal & crude oil.
Share of fuels in energy mix
While most of the countries shifted to natural gas and well-diversified their basket, India and China lagged, which led to a severe pollution crisis. China speedily implemented a clean fuel policy and achieved success, India is yet to experience the positive impact of natural gas usage.
Why India needs Natura Gas
A. Because it is less polluting
B. Because it is cheaper than crude oil
A. Because it is less polluting
i. Cleaner option over coal, diesel & petrol
Not only is CNG more environment friendly than Petrol & Diesel, but also more economical, in terms of running cost.
In the case of coal, the carbon emission is 228.6 pounds per mBtu, which is significantly higher than natural gas. That’s why authorities are pushing industrial units to switch from coal to natural gas as a key fuel. Unfortunately, although coal deteriorates the air quality, it is significantly cheaper than natural gas.
ii. India committed to reducing carbon emissions at the Paris Convention
India is committed to reducing carbon emission and fall in line with the COP21 Paris Convention, according to which India has to reduce 33-35% of greenhouse gas (such as carbon dioxide) emission intensity of its GDP to below 2005 level. This could happen only in 3 ways:
1. An aggressive push to Electric Vehicles (EV), but we don’t have the infrastructure yet
2. Increase the production of renewables & hydropower so that their share in India’s total energy mix increases, but that will take 15-20 years and renewables alone cannot meet the energy requirements of a growing country like India
3. Adopt natural gas and increase its share in the mix. This is possible, because it is abundantly available, and we also have a ready infrastructure.
B. Because it is cheaper than crude oil
i. Global supply glut of natural gas could keep the prices low
Global spot LNG (liquified natural gas) prices are expected to remain stable, or could even decrease, given that the new entrants in the LNG export market are contributing to the global supply glut.
Top LNG exporting countries
LNG export volumes have grown at a CAGR of 5.3% during FY14-19 from 242.8 MT to 314.2 MT (in the last 12 months from Nov 18 to Oct 19, volumes crossed 331.4 MT), which was mainly driven by a significant surge in demand from Japan and China, which are now largest and 2nd largest importers of LNG globally.
Nuclear production came to a halt in Japan after the Fukushima disaster in 2011, which replaced Japanese energy demand by LNG. However, Japan has started rebuilding its nuclear power capacities, which is reducing its dependency on LNG.
Top 5 LNG importing countries
As a result, natural gas demand in Japan is expected to contract by 12-15% due to an economic slowdown and improving usage of nuclear energy (which halted after the Fukushima impact in 2011). Similarly, South Korea is also expected to reduce its natural gas offtake as the country has started building nuclear power capacities. Despite the fact that China and India are upping their natural gas usage, this increase in demand is not likely to offset the overall impact of a slowdown in Japan and South Korea. As a result, natural gas prices are unlikely to rise.
For long term contracts, the price of natural gas is still linked to Brent Crude; however, a sustained gap between the spot and long-term contract prices has decoupled gas pricing from Brent Crude and linked it to gas market hubs. Market driven prices are making natural gas, as a commodity, more liquid and cheaper compared to other fuels.
ii. Lower prices are expected to keep India’s trade deficit under control.
India spends $80-100 billion on crude oil import. Diversification towards natural gas could save a significant amount annually and will also help in controlling pollution levels.
Drivers for natural gas demand in India
Petroleum and Natural Gas Regulatory Board’s9th& 10th round of city gas distribution auctions
In 2018 and 2019, the government opened for bidding the biggest city gas distribution (CGD) licensing auctions – 9th and 10th round, to expand gas distribution across the country. The GoI allocated 298 districts across India to more than 20 city gas distribution (CGD) companies. This will enhance the CGD coverage in India to 404 districts covering 70% of the population. This will require a significantly amount of gas.
Mega revival of fertilizer plants
In 2015, the government approved the revival of four closed urea plants in Telcher, Gorakhpur, SindriandBarauni. The combined capacity of these plants would be over 75 lacs MT per annum and the plants are expected to become fully operational by FY21. Ammonia, which is extracted from natural gas, is the key raw material for Urea, and thus India requires additional natural gas to run upcoming urea plants.
Cap on coal-based power plants.
Currently, the power mix is dominated by coal. Out of a total of ~356 GW of India’s installed power capacity, ~56% is coal-based while only ~7%are gas-based (of which 58% are non-operational due to lack of natural gas). India cannot significantly expand coal-based power capacities (due to its commitment at the Paris meet) and renewable alone cannot meet the country’s growing power demand. Therefore, in the absence of any other alternative in the near future, gas-based power is the only option.
Who will benefit from the rise in natural gas usage in India?
The natural gas industry in India is entering the next leg of prolonged growth, which is expected to benefit multiple sub-industries:
LNG terminal operators
India is planning to raise the contribution of gas in its total energy mix from 7% at present current to 20% by 2025. This translates into a 3.0x expansion in the volume of gas required by then, as India’s total energy requirement is growing at 4.5-5.0% YoY (according to BP Statistics). Even if the country misses its target and achieves this goal by 2030, India would still require a significant amount of natural gas, which is not available domestically. The only option is to import it in LNG form, which is cheaper and more abundantly available, globally.
City gas distribution companies
As mentioned earlier, to improve gas usage in India, GoIauctioned districts across India in the 9th& 10th rounds. The government is targeting an expansion of domestic PNG (piped cooking gas) connections to 100 lacs households by 2022, which is 3.0x of the current base, mostly limited to only NCR, Gujarat & Maharashtra. This will create a substantial opportunity for CGD companies.
Gas ancillary manufacturers
The expansion in the CGD network will generate significant demand for gas ancillary manufacturers – especially gas pumps and gas compressors. There are a very limited number of national players in this space. We are expecting a higher capacity utilization and investments from new players in this space.
Metal pipe manufacturers
Indian transmission companies are laying large diameter metal pipeline of around 11,000 Kms to enhance the reach of natural gas across the country to cater expanded CGD network. In addition, CGD companies are laying a network of medium to low diameter metal pipelines at the city level. This has created a significant demand for metal pipes.
So far, Indian companies involved directly or indirectly in the upcoming gas stories have performed significantly well over the past 1 year and reported moderate to strong sets of financials.
They witnessed such growth without any:
1. Significant material geographic expansion in the CGD network (PNGRB finished the 9th& 10th round of auctions in 2019, expansion is yet to happen)
2. Increase in gas share in the total energy mix
3. Improvement in PLF of gas-based power plants
4. Revival of mothballed fertilizer plants
If these companies could grow their financials without any of the above-mentioned key drivers, then imagine the growth with these key drivers in the years ahead!
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