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Energy
India
Running on low gas. Reliance’s KG D-6 production challenges will likely impact the
availability of natural gas in India while Japan’s Fukushima nuclear plant’s accident is
likely to raise LNG prices. We are turning increasingly cautious on India’s gas story with
gas availability and pricing both emerging as major challenges for the development of a
natural gas market in India. GAIL and GSPL may face challenges in filling their new (and
even extant) pipelines.
RIL’s gas projection may result in much lower-than-expected supply
RIL’s reported clarification to the DGH about production of 38 mcm/d of gas in FY2013E from its
D1 and D3 fields in KG D-6 block may result in result in significantly lower gas supply in India
versus our and Street expectations. RIL’s press release to the stock exchanges on the issue is
somewhat Delphic; however, it raises serious concerns about the supply of gas in India over the
next few years given limited alternatives.
Fukushima accident may likely result in higher LNG prices
We expect Japan to use LNG to increase power generation at its gas-based power plants to make
up for lost generation capacity at Fukushima nuclear plant (9.1 GW capacity). Japan’s gas-based
capacity of 64 GW had an average utilization of ~67% in CY2009 while it imported 73.4 mn tons
of LNG in CY2010 against an available capacity of 179 mtpa; we would clarify that Japan’s LNG
demand is quite seasonal and its large capacity reflects its peak winter demand.
LNG imports may not be able to replace lower domestic gas supplies in India
In our view, high-priced spot LNG may not find acceptance in the price-sensitive fertilizer and
power sectors without a major regulatory and pricing overhaul of the consuming sectors. PLNG
may seem like a natural beneficiary of RIL’s production problems. However, we are less sure about
spot LNG’s ability to replace domestic gas at about a 120-150% premium to domestic gas prices.
GAIL and GSPL may struggle to utilize new planned pipelines; RIL to meet expectations
We expect the new pipelines of GAIL and GSPL to be severely underutilized in their first few years
of operations unless RIL can ramp up gas supply from its KG D-6 gas block. Other domestic gas
sources are either too small or too distant. We estimate RIL’s FY2012E and FY2013E EPS to be well
below consensus estimates of `74 and `86 in case gas production is around 50-55 mcm/d for
FY2012E and 45-50 mcm/d for FY2013E
RIL’s production problems may mean lower gas supply in India
We highlight that continued production problems at RIL’s KG D-6 block would lead to gas
supply falling well below our projections. We model gas supply in India rising to 248 mcm/d
in FY2014E from 179 mcm/d in FY2011E with RIL’s KG D-6 block contributing to 23 mcm/d
out of the incremental 69 mcm/d (see Exhibit 1). However, production of 45-50 mcm/d from
the KG D-6 block (based on RIL’s reported clarification to the DGH) as opposed to 80 mcm/d
assumed by us will result in gas supply increasing by 33-38 mcm/d only.
We note the acute confusion surrounding gas production from RIL’s KG D-6 block. There
have been several conflicting reports about future production.
` Niko Resources had stated on February 11, 2011 that “Niko Resources Ltd. (‘Niko’) (TSX:
NKO) has now received the operator’s volume forecast for the fiscal year ended March 31,
2012. The forecast predicts that volumes during the period will remain flat at current
production levels. The forecast has been approved by Niko and the operator and has been
forwarded to the Director General of Hydrocarbons.” Gas production has hovered at
around 51-52 mcm/d over the past few months.
` The DGH had stated on March 8, 2011 that "As per their [Reliance Industries'] plan
submitted to us, the gas output from KG-D6 may rise to 67 million metric standard cubic
meters a day (MMSCMD) in April."
` A website Indiapetro.com had reported on March that gas production from D1 and D3
fields may be 38 mcm/d in FY2013E and 47 mcm/d including 9 mcm/d of gas from MA-1
field.
` Reliance had filed a statement to the exchanges on March 18, 2011 stating that
"Reliance Industries Limited (RIL) has ongoing discussions, consultation and
correspondence with the Director General of Hydrocarbons in respect of regulatory
compliance, technical reviews and finalization of work program and budgets for the
future years. The projected production figures referred to in the media are purely
provisional and indicative and are subject to such variations as may emerge during the
actual operations in the future years. These variations can be on account of physical
inputs, work program as well as geological and reservoir complexity. RIL makes the
necessary disclosures of actual production from its domestic oil and gas segment in its
quarterly financial releases."
Japan’s nuclear plant accident will likely lead to higher LNG demand and prices
We believe additional imports of spot LNG may lead to higher prices for spot LNG. In our
view, Japan may have to rely on additional power generation from gas-based power plants
to make up for lost capacity at the Fukushima nuclear plant. Exhibits 2-4 show that Japan
has sufficient gas-based power generation and LNG import facility to generate more power
from its gas-based power plants.
We note that expensive LNG may not be able to replace domestic gas as India will likely face
both supply and pricing constraints.
` We believe supply of LNG at the right price may limit supply of LNG into India even
though India will have meaningful import capacity. India has tied up only 33 mcm/d (8.75
mtpa) of gas supply through long-term contracts compared to LNG import capacity of 95
mcm/d by end-FY2012E. Our supply projections factor in LNG imports rising to 69 mcm/d
in FY2014E from 36 mcm/d in FY2011E. Most of the incremental LNG will have to be in
the form of spot LNG.
` We expect pricing of imported LNG to act as a constraint given the tight regulation of
pricing for a major end-product (urea) in India and option of coal-based power generation
in India. It may be better for India to import urea directly rather than produce it from very
high-priced LNG (over US$12/mn BTU). Also, it may be much cheaper to generate power
based on imported coal (if domestic coal is not sufficient). Exhibit 5 compares the cost of
power generation based on various fuels.
GAIL and GSPL may face challenges in sourcing gas; RIL in meeting expectations
Exhibit 6 gives our estimates for gas transmission volumes for GAIL and GSPL over the next
few years and compares the same with supply of gas in India. We see significant risks to our
assumptions if RIL’s gas production was to fall short of our estimates. Both GAIL and GSPL
are setting up new pipelines and we expect very low capacity utilization in the new pipelines
if gas supply is below our expectations.
` GAIL. Exhibit 7 gives our assumptions of gas transmission volumes for GAIL’s major new
pipelines and their stated capacity. We note that some of GAIL’s new pipelines originate
from new LNG terminals and their capacity utilization will depend on India’s ability to
source LNG at reasonable prices. The capacity utilization of GAIL’s expanded HVJ-DV
system will depend on domestic supply of gas, particularly from RIL’s KG D-6 block
` GSPL. We see downside risks to our 12-month DCF-based fair valuation of `90
from lower-than-expected gas transmission volumes and tariffs. Also, we see
serious risks to gas availability for GSPL’s two cross-country new pipelines. We see
very low possibility of additional gas supply in India to feed GSPL’s two new
pipelines with a combined capacity of 96 mcm/d. In our view, most of the
incremental gas will likely be transmitted through GAIL’s new and extant
pipelines.
` RIL. We see downside risks to our FY2013E estimates of RIL if KG D-6 production is
below our expectations. We model KG D-6 gas production at 52 mcm/d, 65 mcm/d and
80 mcm/d in FY2012E, FY2013E and FY2014E. We estimate RIL’s FY2013E and FY2014E
EPS at `70 and `76 if gas production remains at the current production rate of 52 mcm/d.
We currently estimate FY2013E and FY2014E EPS at `72 and `80.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Energy
India
Running on low gas. Reliance’s KG D-6 production challenges will likely impact the
availability of natural gas in India while Japan’s Fukushima nuclear plant’s accident is
likely to raise LNG prices. We are turning increasingly cautious on India’s gas story with
gas availability and pricing both emerging as major challenges for the development of a
natural gas market in India. GAIL and GSPL may face challenges in filling their new (and
even extant) pipelines.
RIL’s gas projection may result in much lower-than-expected supply
RIL’s reported clarification to the DGH about production of 38 mcm/d of gas in FY2013E from its
D1 and D3 fields in KG D-6 block may result in result in significantly lower gas supply in India
versus our and Street expectations. RIL’s press release to the stock exchanges on the issue is
somewhat Delphic; however, it raises serious concerns about the supply of gas in India over the
next few years given limited alternatives.
Fukushima accident may likely result in higher LNG prices
We expect Japan to use LNG to increase power generation at its gas-based power plants to make
up for lost generation capacity at Fukushima nuclear plant (9.1 GW capacity). Japan’s gas-based
capacity of 64 GW had an average utilization of ~67% in CY2009 while it imported 73.4 mn tons
of LNG in CY2010 against an available capacity of 179 mtpa; we would clarify that Japan’s LNG
demand is quite seasonal and its large capacity reflects its peak winter demand.
LNG imports may not be able to replace lower domestic gas supplies in India
In our view, high-priced spot LNG may not find acceptance in the price-sensitive fertilizer and
power sectors without a major regulatory and pricing overhaul of the consuming sectors. PLNG
may seem like a natural beneficiary of RIL’s production problems. However, we are less sure about
spot LNG’s ability to replace domestic gas at about a 120-150% premium to domestic gas prices.
GAIL and GSPL may struggle to utilize new planned pipelines; RIL to meet expectations
We expect the new pipelines of GAIL and GSPL to be severely underutilized in their first few years
of operations unless RIL can ramp up gas supply from its KG D-6 gas block. Other domestic gas
sources are either too small or too distant. We estimate RIL’s FY2012E and FY2013E EPS to be well
below consensus estimates of `74 and `86 in case gas production is around 50-55 mcm/d for
FY2012E and 45-50 mcm/d for FY2013E
RIL’s production problems may mean lower gas supply in India
We highlight that continued production problems at RIL’s KG D-6 block would lead to gas
supply falling well below our projections. We model gas supply in India rising to 248 mcm/d
in FY2014E from 179 mcm/d in FY2011E with RIL’s KG D-6 block contributing to 23 mcm/d
out of the incremental 69 mcm/d (see Exhibit 1). However, production of 45-50 mcm/d from
the KG D-6 block (based on RIL’s reported clarification to the DGH) as opposed to 80 mcm/d
assumed by us will result in gas supply increasing by 33-38 mcm/d only.
We note the acute confusion surrounding gas production from RIL’s KG D-6 block. There
have been several conflicting reports about future production.
` Niko Resources had stated on February 11, 2011 that “Niko Resources Ltd. (‘Niko’) (TSX:
NKO) has now received the operator’s volume forecast for the fiscal year ended March 31,
2012. The forecast predicts that volumes during the period will remain flat at current
production levels. The forecast has been approved by Niko and the operator and has been
forwarded to the Director General of Hydrocarbons.” Gas production has hovered at
around 51-52 mcm/d over the past few months.
` The DGH had stated on March 8, 2011 that "As per their [Reliance Industries'] plan
submitted to us, the gas output from KG-D6 may rise to 67 million metric standard cubic
meters a day (MMSCMD) in April."
` A website Indiapetro.com had reported on March that gas production from D1 and D3
fields may be 38 mcm/d in FY2013E and 47 mcm/d including 9 mcm/d of gas from MA-1
field.
` Reliance had filed a statement to the exchanges on March 18, 2011 stating that
"Reliance Industries Limited (RIL) has ongoing discussions, consultation and
correspondence with the Director General of Hydrocarbons in respect of regulatory
compliance, technical reviews and finalization of work program and budgets for the
future years. The projected production figures referred to in the media are purely
provisional and indicative and are subject to such variations as may emerge during the
actual operations in the future years. These variations can be on account of physical
inputs, work program as well as geological and reservoir complexity. RIL makes the
necessary disclosures of actual production from its domestic oil and gas segment in its
quarterly financial releases."
Japan’s nuclear plant accident will likely lead to higher LNG demand and prices
We believe additional imports of spot LNG may lead to higher prices for spot LNG. In our
view, Japan may have to rely on additional power generation from gas-based power plants
to make up for lost capacity at the Fukushima nuclear plant. Exhibits 2-4 show that Japan
has sufficient gas-based power generation and LNG import facility to generate more power
from its gas-based power plants.
We note that expensive LNG may not be able to replace domestic gas as India will likely face
both supply and pricing constraints.
` We believe supply of LNG at the right price may limit supply of LNG into India even
though India will have meaningful import capacity. India has tied up only 33 mcm/d (8.75
mtpa) of gas supply through long-term contracts compared to LNG import capacity of 95
mcm/d by end-FY2012E. Our supply projections factor in LNG imports rising to 69 mcm/d
in FY2014E from 36 mcm/d in FY2011E. Most of the incremental LNG will have to be in
the form of spot LNG.
` We expect pricing of imported LNG to act as a constraint given the tight regulation of
pricing for a major end-product (urea) in India and option of coal-based power generation
in India. It may be better for India to import urea directly rather than produce it from very
high-priced LNG (over US$12/mn BTU). Also, it may be much cheaper to generate power
based on imported coal (if domestic coal is not sufficient). Exhibit 5 compares the cost of
power generation based on various fuels.
GAIL and GSPL may face challenges in sourcing gas; RIL in meeting expectations
Exhibit 6 gives our estimates for gas transmission volumes for GAIL and GSPL over the next
few years and compares the same with supply of gas in India. We see significant risks to our
assumptions if RIL’s gas production was to fall short of our estimates. Both GAIL and GSPL
are setting up new pipelines and we expect very low capacity utilization in the new pipelines
if gas supply is below our expectations.
` GAIL. Exhibit 7 gives our assumptions of gas transmission volumes for GAIL’s major new
pipelines and their stated capacity. We note that some of GAIL’s new pipelines originate
from new LNG terminals and their capacity utilization will depend on India’s ability to
source LNG at reasonable prices. The capacity utilization of GAIL’s expanded HVJ-DV
system will depend on domestic supply of gas, particularly from RIL’s KG D-6 block
` GSPL. We see downside risks to our 12-month DCF-based fair valuation of `90
from lower-than-expected gas transmission volumes and tariffs. Also, we see
serious risks to gas availability for GSPL’s two cross-country new pipelines. We see
very low possibility of additional gas supply in India to feed GSPL’s two new
pipelines with a combined capacity of 96 mcm/d. In our view, most of the
incremental gas will likely be transmitted through GAIL’s new and extant
pipelines.
` RIL. We see downside risks to our FY2013E estimates of RIL if KG D-6 production is
below our expectations. We model KG D-6 gas production at 52 mcm/d, 65 mcm/d and
80 mcm/d in FY2012E, FY2013E and FY2014E. We estimate RIL’s FY2013E and FY2014E
EPS at `70 and `76 if gas production remains at the current production rate of 52 mcm/d.
We currently estimate FY2013E and FY2014E EPS at `72 and `80.
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