<p> </p><p align="justify"><span class="dropthecap">P</span>etronet LNG — majority owned by Government of India — is one company that is perhaps closely watching the court case between the Ambani brothers over the supply of Krishna-Godavari Basin gas. The availability of natural gas from the KG Basin at lower prices can have an adverse impact on Petronet's business. <br /><br />But Petronet's management is not fretting yet. "It is a supply-based demand for gas in India," says P. Dasgupta, managing director and CEO of Petronet, hinting that there is space for all to operate. "We are happy being the third or fourth supplier in the country," he says. India's gas demand is set to increase from 180 million standard cubic metres per day (mmscmd) in FY08 to 280 mmscmd by year 2011-12. While Reliance Industries (RIL) can add 80 mmscmd at full capacity, experts say, there will still be latent demand.<br /><br /><img style="width: 200px; height: 197px" src="http://www.businessworld.in/bw/image/Business/EnergyAndPower/margin_woes_pu.gif" border="0" alt="Click here to view enlarged image" title="Click here to view enlarged image" align="right" />Petronet sources LNG (liquefied natural gas) through a strategic tie-up with Qatar's RasGas and sells it to three intermediate buyers — Gail, Indian Oil and Bharat Petroleum Corporation — who in turn sell gas to the end users. The company, however, recently announced plans to become its own customer by diversifying into power generation. It plans to set up two 1,200-MW power plants at Dahej in Gujarat and Kochi. As per industry estimates, gas procured at $6 per mmbtu could help generate power at Rs 3.5 per unit. This is much higher than coal-based projects — anywhere from Rs 1.6-2.5 per unit. <br /><br />The price dynamics have changed since RIL's gas find at the KG Basin. "Domestic gas of Reliance could now be much cheaper than $8-plus per million metric British thermal unit (mmbtu) paid by LNG customers currently," says Ballabh Modani, analyst at Enam Securities. Also, a CLSA brokerage report indicates pre-tax delivery price of $6 per mmbtu in Maharashtra and Gujarat for RIL's gas. For Petronet, it could be $7.5 over the next two years (see ‘Rather Costly'). Experts say it is <br />only a matter of time, before the gas buyers switch loyalties. <br /><br />For instance, Ratnagiri Gas and Power (erstwhile Dabhol) has started sourcing gas from RIL instead of Petronet for its Maharashtra plant. Petronet was supplying gas to them at $7.8 per mmbtu, but now with RIL supplying at $6.2 per mmbtu, they are saving 35-40 paise per unit of power generated. RIL itself buys gas from Petronet at spot prices, but that is likely to stop once RIL scales up production. <br /><br />But there are other serious issues that are taking a toll on Petronet's margins. Escalating gas procurement cost and lack of long-term supplier and buyer contracts. <br /><br />The company is also in expansion mode. "Our long-term concern is that Petronet may find it difficult to sell long-term contract volumes as linkage of its LNG price to oil rises," says an analyst with a foreign brokerage house. Till December 2008, RasGas supplied gas to the company at a fixed rate — based on $20 per barrel pricing. But from this year, the prices will get increasingly aligned to market prices of oil — it hit $80 per barrel levels recently. <br /><br /><img style="width: 450px; height: 347px" src="http://www.businessworld.in/bw/image/Business/EnergyAndPower/rather_costly_450x347.gif" border="0" alt=" " align="middle" />"For the September 2009 quarter, average LNG procurement cost per unit (trillion British thermal unit, or tBtu) for Petronet increased by 43 per cent year-on-year (y-o-y) primarily because of the rise in the cost of contracted gas (owing to its linkage with Japanese cocktail crude prices) and rupee depreciation," says Deepak Pareek, an analyst at Angel Broking.<br /><br />A calculation by another brokerage shows that at an oil price of $80 per barrel, freight on board (FOB) price of gas from Qatar could rise to $10 per mmbtu for Petronet's Dahej operations and up to $10.7 per mmbtu at Kochi, which will get gas from Gorgon, Australia. The landed prices may be even higher after taking into account shipping, customs and regasification charges touching $13 per mmbtu (for Kochi terminal). At these rates, Petronet will find it difficult to attract buyers.<br /><br />The company recently went for capacity expansion. It increased its LNG regasification capacity at Dahej from 6.5 mmtpa to 11.5 mmtpa. It also plans to come up with 2.5 mmtpa facility at Kochi, which could be extended to 5 mmtpa. RasGas currently supplies 5 mmtpa and will supply an additional 2.5 mmtpa from next year, according to a brokerage report. From the Gorgon project — it inked a deal recently — its Kochi terminal would get 1.5 mmtpa. But that would pour in only by 2014, while Kochi terminal would be operational by early 2012. <br /><br />The viability of new projects is hinged on its ability to get long-term customers and that is where the plot of getting into power generation fits in. For now, the firm is dabbling more in the spot market. "We could break even with our first 7.5 mmtpa of operations and rest we could play in the spot market," says Dasgupta. <br /><br />Higher cost of sourcing LNG and higher extent of spotting has hit its margin. Its operating profit margins contracted to 7.4 per cent in the September 2009 quarter compared to 11 per cent in the same period last year mainly due to negative marketing margin and increase in LNG cost (see ‘Margin Woes'). <br /><br />Analysts believe that with likely increase in gas supplies from the KG basin, selling high quantity of spot volumes will be an arduous task for Petronet. </p> <script type="text/javascript"> var intro = jQuery.trim(jQuery('#commenth4').text()) var page = jQuery.trim(jQuery('#storyPage').text()) if (page.indexOf(intro) < 0) { jQuery('#commenth4').attr('style', 'display:block;') } </script><div>(This story was published in Businessworld Issue Dated 30-11-2009)</div>