OIL & GAS SECTOR: Regulatory Action may Catalyse Future Growth

India’s petroleum sector was the unwanted child for much of 2012, but there is light at the end of the tunnel for the sector as the government shakes off its inertia and shows signs of addressing its problems. Investors, though selective, are turning bullish as the government appears to be moving towards market pricing of petro products, though total decontrol may be years away.
In 2012, the BSE Oil & Gas index rose 10%, underperforming the 25% gain for the broader benchmark BSE Sensex. Much of this underperformance was due to policy inaction-induced bleak earnings outlook. It is changing now. The petroleum ministry is expected to make headway on the long-standing issues regarding E&P capex approvals for Reliance Industries and Cairn India. The Rangarajan Committee on pricing of gas is supposedly recommending linking of price to international benchmark such as Henry Hub in the US, or imported liquefied natural gas prices. If done, it improves the earnings outlook for explorers such as RIL and Cairn.
“In our recent interaction, government officials sounded more positive and indicated that the pace of decisionmaking has improved. DGH is working towards improving the attractiveness of Indian E&P, while PNGRB is trying to bring in more transparency,” cited a report from Motilal Oswal in mid-December. The research house expects this to be positive for RIL and Cairn.
The government had constituted a committee under the chairmanship of C Rangarajan, chairman, PM’s Economic Advisory Council on May 31, 2012, to look into the design of future production sharing contracts in hydrocarbon and suggest guidelines for pricing domestically produced gas.
“Beyond 2014, we expect to see a review of pricing terms. Currently, our only producing block KG-D6 offers gas at $4.20 per mmbtu, which will remain in force till April 2014. Based on current alternative LNG import pricing, and recognising that a competitive pricing framework is essential for domestic development activity, we see considerable scope for a more market-linked gas pricing regime to prevail post 2014,” said Bob Fryar, executive VP, production at BP Global, at an upstream investor day earlier this month. BP holds 30% stake in the KG-D6 block operated by Reliance.
ABarclays report on the oil & gas sector highlighted that the natural gas prices could rise with a decision on KG-D6 price revision likely in FY14. This will be a positive for ONGC and Oil India, besides RIL.
A few foreign brokerage houses such as UBS and CLSA have turned positive on Reliance last month on hopes of resolution of regulatory issues and gas pricing. It may be still too early to forecast how the government regulations would shape up. But any govt action could only be positive from where it was for the last few years.

OMCs Set to Float 3,500-cr Global Tender for Ethanol

Public sector oil marketing firms are readying to jointly float a . 3,500-crore global tender to source ethanol, which will have to be mandatorily blended with petrol sold across the country following the government’s directive. Officials of Indian Oil, BPCL and HPCL, the three state-run oil marketing firms, and the oil ministry will be meeting over the next few days to finalise the details of the tender, a person familiar with the matter told ET, adding that the industry will need about 1,000-1,100 million litres of ethanol a year.
The success of the tender is expected to determine the feasibility of the pan-India rollout of the 5% ethanol-blended petrol programme, which is already functional in 13 states. The government had postponed the deadline for the nationwide roll-out of the programme to June 1, 2013 from December 1, 2012.
Since the oil marketing companies are not in a position to take care of the infrastructure needed to import, store and transport the material, the tender will involve delivery at their depots numbering more than 350 across the country. 
Hindustan Petroleum had, through its wholly-owned subsidiary HPCL Biofuels, acquired two sugar mills in Bihar that it revived in the previous fiscal. These units can supply nearly 32.5 million litres, about 10-12% of the company’s annual ethanol requirement.
The three firms had attempted to source ethanol directly from the world’s biggest producer, Brazil, in 2006, when the blending programme was introduced subject to commercial viability. Between 2006 and 2009, these companies floated tenders to procure the necessary quantities of ethanol. “Our experience during those three years was that the contracted volumes were always lower than the requirement and the actual supplies would fall short of the contracted volumes,” said an official, who did not wish to be named. In 2009, the process changed with the government fixing the price at . 27 per litre. These companies had to float EoI for the quantities needed, which led to an improvement in the contracted volumes and supplies.

PETRONET LNG: Kochi Unit May Take a While to Ramp Up

The stock of India’s largest importer of natural gas, Petronet LNG, lost close to 1% on Wednesday on reports that the commissioning of its Kochi terminal will miss the deadline of the last quarter of FY13. This may not be a major setback for the energy major, as the ramping up of the project for the future was already in limbo due to lack of pipeline connectivity and customer base.
Petronet LNG’s 5 million tonnes per annum (MTPA) unit at Kochi is in addition to the 10 MTPA plant at Dahej. The Kochi unit was to begin commercial operations in the quarter to March 13. This is now facing some delays.
At the . 4,200-crore Kochi plant, regassification tariff will be higher than the $0.65 per million British thermal units (MMBTU) at Dahej. The company had mentioned in its annual report for FY12 that it has already tied up 1.5 MTPA of short-term LNG supply for the Kochi project. Supply of 1.44 MTPA of LNG from Australia’s Gorgon project on long-term contract will begin in 2014.
However, capacity utilisation at the new plant will remain below par for a few quarters post commissioning since the pipelines connecting it to key consumption hubs of Bangalore and Mangalore are delayed. “Initial volumes are likely to be low due to lack of a developed customer base and pipeline connectivity delays,” said a Credit Suisse report in October.
High LNG prices are affecting consumer interest too. NTPC’s Kayamkulam plant (potential consumption of approx 1.2 MTPA) has is not ready to sign a PPA at the current price, according to a recent report from Karvy Stock Broking. Also, Gail, which is laying the pipelines, is facing public resistance at different places along the route.
The Karvy report said that out of the optimal capacity of 5 MTPA, volume visibility is limited to 1 MTPA at Kochi. Sub-optimal use of capacity will mean undue burden on the company’s financials.