Impact on Fertilizers and Petrochemicals Almost Imminent as GAIL Struggles with LNG Imports

New Delhi: In the latest turn of events, GAIL faced a 4% drop in imports when Gazprom exercised force majeure on its long-term contract with the company, resulting in some cargoes being unable to supply gas to GAIL for the time being. Consequently, GAIL is likely to have cut gas supplies to fertilizers, power, and petrochemical users. Finding alternative cargo is currently difficult due to the high demand from Europe. Given that there may not be enough demand from final users for pricey gas, GAIL will be cautious when procuring it, according to a source in the know.

Considering that the current spot energy prices are 40 USD per MMBtu compared to 19 USD per MMBtu last year because there are currently supply concerns, this would undoubtedly result in costly gas supplies.

GAIL, which operates India's largest gas pipeline network to import and distribute gas, is likely to have reduced supply to its customers. GAIL contracts with Gazprom to purchase roughly 10.3 mms cubic meters per day or 2.85 million tonnes annually. This represents 13% of all imported gas in the country, which is a significant proportion.

These supply cuts will mostly affect the downstream industries like fertilizer, electricity, and petrochemicals. Fertilizer companies can probably do a pass-through because there is a subsidy mechanism in place, whereas power companies may not be able to purchase that expensive gas, which can be a problem, so the industry is looking at alternative sources such as coal, hydropower, and so on. On the other hand, Investors fear the unfolding crisis could sharply hit GAIL India's natural gas volumes and earnings in the coming quarters.

Alternative supplies in Europe may be hard to find and expensive because of the current situation between Russia and Ukraine. GAIL is now forced to source alternative supplies from the global spot market, where prices are nearly three times those of long-term contracts due to Gazprom's lack of natural gas supply.

A fertilizer industry source with knowledge of the restrictions stated that lower gas supply on the domestic market will impact India's urea production and that a sustained cut will increase imports of the soil fertilizer. Given that each has a long-term contract and implications for the entire world, it is predicted that this will only be a short-term concern. As a result, it would be resolved by the end of the month or sooner