The short-term outlook for natural gas companies has turned negative, but their long-term prospects remain bright. Investors can consider Gail, Gujarat Gas and Gujarat State Petronet with a horizon of 1-2 years
NATURAL GAS is a scarce commodity in India, with huge unmet demand and limited supply. It is a cheaper and cleaner source of energy compared to crude oil. However, it needs a network of pipelines for transportation from the point of production to the point of consumption. This has necessitated the development of natural gas transmission companies in bulk, as well as retail segments.
India today consumes around 95 million standard cubic metres per day (mmscmd) of natural gas, of which, over 65% is produced by state-owned exploration majors ONGC and Oil India. Nearly 20% of this is imported by way of liquefied natural gas (LNG), while the rest is produced by private players.
Among listed natural gas companies, Gail is India’s largest cross-country transporter with pipelines stretching over 7,800 km. Gujarat State Petronet is another bulk transporter of gas, but its infrastructure is entirely located in Gujarat. Gujarat Gas and Indraprastha Gas are retailers with well-established city gas distribution (CGD) networks.
India’s natural gas industry appears to be on the cusp of a major change with Reliance Industries’ Krishna Godavari basin oil blocks expected to commence gas production in the second half of ’08. When the gas production reaches its peak in ’09, the output is estimated to be equivalent to nearly 80% of India’s current consumption.
This will be supplemented by output from other players such as Gujarat State Petroleum (GSPC) and ONGC, which are also developing their oil & gas fields on the east coast. All put together, the availability of natural gas is set to jump three-fold in the next four years. This augurs well for natural gas transporters. Their revenues will shoot up as capacity utilisation levels of their networks increases.
In the short term, however, government policies are adversely affecting the growth of India’s natural gas industry. The government recently revoked the freedom of sale to third parties granted to the Panna, Mukta, Tapti (PMT) joint venture and appointed Gail as the sole evacuee for its entire production of 17 mmscmd. According to the government, this decision was taken to ensure sufficient gas supply to the priority sectors, viz fertilisers and power. However, the move goes against the commercial interest of PMT, which is the country’s largest producer of natural gas.
In another development, the Petroleum and Natural Gas Regulation Board (PNGRB) unveiled regulations for city gas distribution (CGD) projects. Besides setting out eligibility criteria and granting exclusivity to the players, these regulations put a cap on network tariffs and compression charges. The regulations also seek to cap the rate of return on capital employed (RoCE) at 14%.
While Gail stands to gain from this, private players are at the receiving end. As a result, their stocks have fallen heavily over the past couple of months. Gujarat Gas has lost over 33%, Indraprastha 23% and GSPL 24% — which is more than the 16% fall witnessed in the Sensex. In contrast, Gail’s stock has sustained its level at around Rs 425 between February and April ’08.
The redistribution of PMT gas will impact final consumers as well as transporters. Gail’s pipelines will witness an increase in volumes, and with the $0.12 per mmscmd transportation charges, the company will gain from this arrangement. On the other hand, Gujarat State Petronet will witness a minor reduction in the volumes transported through its network. Gujarat Gas is set to suffer as its supply has been curtailed by around 0.7 mmscmd. This will leave the company with limited volume of gas, which will be just sufficient to satisfy its existing CNG and PNG customers. As no alternative sources of gas are likely to be available in the near future, this will hamper its growth in the near term.
NATURAL GAS is a scarce commodity in India, with huge unmet demand and limited supply. It is a cheaper and cleaner source of energy compared to crude oil. However, it needs a network of pipelines for transportation from the point of production to the point of consumption. This has necessitated the development of natural gas transmission companies in bulk, as well as retail segments.
India today consumes around 95 million standard cubic metres per day (mmscmd) of natural gas, of which, over 65% is produced by state-owned exploration majors ONGC and Oil India. Nearly 20% of this is imported by way of liquefied natural gas (LNG), while the rest is produced by private players.
Among listed natural gas companies, Gail is India’s largest cross-country transporter with pipelines stretching over 7,800 km. Gujarat State Petronet is another bulk transporter of gas, but its infrastructure is entirely located in Gujarat. Gujarat Gas and Indraprastha Gas are retailers with well-established city gas distribution (CGD) networks.
India’s natural gas industry appears to be on the cusp of a major change with Reliance Industries’ Krishna Godavari basin oil blocks expected to commence gas production in the second half of ’08. When the gas production reaches its peak in ’09, the output is estimated to be equivalent to nearly 80% of India’s current consumption.
This will be supplemented by output from other players such as Gujarat State Petroleum (GSPC) and ONGC, which are also developing their oil & gas fields on the east coast. All put together, the availability of natural gas is set to jump three-fold in the next four years. This augurs well for natural gas transporters. Their revenues will shoot up as capacity utilisation levels of their networks increases.
In the short term, however, government policies are adversely affecting the growth of India’s natural gas industry. The government recently revoked the freedom of sale to third parties granted to the Panna, Mukta, Tapti (PMT) joint venture and appointed Gail as the sole evacuee for its entire production of 17 mmscmd. According to the government, this decision was taken to ensure sufficient gas supply to the priority sectors, viz fertilisers and power. However, the move goes against the commercial interest of PMT, which is the country’s largest producer of natural gas.
In another development, the Petroleum and Natural Gas Regulation Board (PNGRB) unveiled regulations for city gas distribution (CGD) projects. Besides setting out eligibility criteria and granting exclusivity to the players, these regulations put a cap on network tariffs and compression charges. The regulations also seek to cap the rate of return on capital employed (RoCE) at 14%.
While Gail stands to gain from this, private players are at the receiving end. As a result, their stocks have fallen heavily over the past couple of months. Gujarat Gas has lost over 33%, Indraprastha 23% and GSPL 24% — which is more than the 16% fall witnessed in the Sensex. In contrast, Gail’s stock has sustained its level at around Rs 425 between February and April ’08.
The redistribution of PMT gas will impact final consumers as well as transporters. Gail’s pipelines will witness an increase in volumes, and with the $0.12 per mmscmd transportation charges, the company will gain from this arrangement. On the other hand, Gujarat State Petronet will witness a minor reduction in the volumes transported through its network. Gujarat Gas is set to suffer as its supply has been curtailed by around 0.7 mmscmd. This will leave the company with limited volume of gas, which will be just sufficient to satisfy its existing CNG and PNG customers. As no alternative sources of gas are likely to be available in the near future, this will hamper its growth in the near term.
The cap on network tariffs and compression charges will also have a negative impact on Gujarat Gas and Indraprastha Gas, which operate in the CGD business. However, Indraprastha Gas will suffer more as it mainly uses gas at administered prices (APM). Indraprastha’s RoCE has consistently stayed above 40% for the past five years, which will now reduce sharply. The only solace for these players is that their marketing margins continue to remain free of these restrictions.
Thus, while the short-term outlook for natural gas transporters has turned somewhat negative, their long-term prospects continue to remain bright. As more gas becomes available, all these players will register healthy revenue growth on the back of higher volumes. Since the scrips of these companies have come off their highs substantially, investors should consider putting their money in them — particularly Gail, Gujarat Gas and Gujarat State Petronet — with a long-term horizon of 1-2 years.
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