Rise in US natural gas prices to hurt GAIL prospects

Mumbai: Natural gas prices in the US hit a 13-year high on growing concern of stockpiling of the power plant falling short of demand this summer. Natural gas prices crossed the $8 per mmBtu (million British thermal units) mark, the highest level since September 2008. This will reflect in GAIL’s gas trading segment.

The ongoing Russia-Ukraine war which has disrupted various commodity supply chains and has also led to a spike in demand for the US gas. About 30% of planned US liquefied natural gas export capacity has been secured since Russia's attack on Ukraine, according to a Bloomberg report.

The sudden rise in gas prices could negatively impact GAIL as the prices of sourcing gas increase. The Indian importer has 20-year deals to buy 5.8 million tonnes a year of U.S. LNG, split between Dominion Energy's Cove Point plant and Cheniere Energy's Sabine Pass site in Louisiana. GAIL buys these LNGs at contracted prices from the international market and sells them at contracted and/or spot prices in both the domestic and international markets.

Nearly 50% of imported LNG volumes are from the U.S. and the prices of the same are linked to Henry Hub – the benchmark gas price in the U.S. As per the contracts, LNG is bought at 115% of Henry Hub price plus a fixed liquefaction charge of $3 per mmBtu.

So far, the average price of Henry Hub in FY23 is around $6.9/mmBtu, against an average price of $3.6 in FY22 and $4.5 in Q4FY22. As the prices have increased, the premium of average spot prices to the buying cost of gas has reduced sharply.

($/mmBtu)	FY22	Q4FY22	Current
Henry Hub Prices	3.6	4.5	7.9
115% of HH Prices	4.14	5.18	9.09
Fixed Cost	3	3	3
Transportation	1.75	1.75	1.75
Total Buying Cost	8.89	9.93	13.84
Average Spot LNG Prices	22	31	24
Brent Crude Linked LNG Prices	10.7	13	14

Source: Data Compiled By ETNOW

Incred Equities which downgraded its rating on GAIL on April 5, said that in the volatile commodity price environment, the trading business is fraught with risk. GAIL operates on wafer-thin margins and when underlying commodity prices increase, then this margin will be lost in the cost of hedging itself. Q3FY22 was just plain luck, and it won’t get repeated.