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GAIL could benefit from fall in US natural gas prices

Natural gas prices in the US reported a sharp drop owing to a fire incident in a US-based Freeport LNG (liquefied natural gas) terminal. This has increased gas availability in the US, which led to a 16.5% drop in the US gas prices. The company expects to restore partial operations in the next 90 days and full operations, not until late 2022.

Soumeet Sarkar

Updated Jun 15, 2022, 10:56 IST

Courtesy: GAIL website

Photo : ET Now Digital

New Delhi: Natural gas prices in the US reported a sharp drop owing to a fire incident in a US-based Freeport LNG (liquefied natural gas) terminal. This has increased gas availability in the US, which led to a 16.5% drop in the US gas prices.

Relevance Of Freeport LNG Terminal

Freeport LNG exports 57 million standard cubic metres of gas per day, and nearly 10% of this goes to Europe. Thus due to more gas availability in the US, the prices have dropped, but lower gas availability in Europe has led to a surge in European gas prices.

The company expects to restore partial operations in the next 90 days and full operations, not until late 2022.

Why Does It Benefit GAIL?

GAIL buys LNG at contracted prices from the international market and sells it at contracted and/or spot prices in both the domestic and international markets.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.

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 million British thermal units (mmBtu).

Thus a fall in benchmark price will reduce the gas sourcing cost of GAIL.

Brokerage View

Jefferies:- GAIL's uncontracted Henry Hub linked volumes will see a sharp improvement in arbitrage as European/Asia LNG markets tighten owing to the supply loss. The benefits could sustain over 2HCY2022 based on Freeport's assessment.

Morgan Stanley:- Decline in Henry hub gas prices should be positive for GAIL as it expands marketing margins for 40% of the portfolio gas it imports from the US.

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