• Gujarat Gas: Double whammy of falling oil and rising gas prices

    Gujarat Gas Ltd – India’s largest city gas distributor in terms of volumes – is facing a double whammy of falling crude prices and rising gas prices. According to Credit Suisse, the reducing spread between gas and crude prices makes alternate fuels like propane more attractive as compared to gas.

    Gas prices have reasons due to multiple factors – shutdown of FreePort LNG terminal in the US, Nord Stream pipeline is expected to go under week-long annual maintenance in mid-July 2022, Norway’s pipeline to the UK is under maintenance and given the fact that most of the US gas into Europe comes from the Gulf of Mexico coast which is at the brink of the Hurricane season, which may affect shipping lines, according to Credit Suisse.

    Asia Spot Gas prices jumped to $37/mmBtu as against last month’s average prices of around $23/mmBtu. This sudden rise in spot gas prices could impact Gujarat Gas’ volumes and/or margins. Gujarat Gas’ dependence on imported gas is the highest as it derives most of its revenue by selling gas to industries. Nearly 75% of its total sales volume is from industrials.

    At present, Gujarat Gas has a 30%-35% gas sourcing requirement that is dependent on the spot market, while the rest comes from domestic gas and long-term contracts. In the industrial region of Morbi – the main market of Gujarat Gas – industries are shifting to propane as gas has become expensive.

    With a further increase in prices, the shift towards propane could accelerate. On the other hand, if Gujarat Gas keeps the gas prices at current levels, then the same could impact margins.

    Recently, ETNOW and ETNOW Swadesh had interacted with Manoj Patel, Vice President, Morbi Ceramic Association, where he said that propane continues to remain cheaper by around 11%-12% as compared to gas prices. Currently, half of the fuel requirement is supplied through Gujarat Gas and the rest is propane, and if the gas price remains high, within the next 2-3 months, 60%-70% of gas volumes could go towards propane, he added.

    However, Motilal Oswal continues to remain bullish on Gujarat Gas ass it believes that over the long term, LNG would continue to remain cheaper than LPG, except during the summer season. Further, increased availability of domestic gas over the few months is likely to help the company to reduce its sourcing cost, thereby helping improve its margins.

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