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Gas Utilities
Falling D6 prod improves LNG outlook
We maintain that falling dom gas prod will force govt to prioritise gas supply to
fertiliser/power sectors, forcing the rest (which have greater affordability) to buy
LNG. This would involve changing contract terms, but there is precedent of govt
doing that . PLNG (TP Rs150) remains key beneficiary of higher LNG demand.
! Gas consumers have been allocated 63.715mmscmd by the empowered group of ministers
(EGOM) from the KG-D6 block operated by Reliance Industries (RIL). We estimate that actual
contracts signed in relation to these firm allocations is around 55.5mmscmd (see table below).
Some customers with firm allocation are not in a position to take the gas and hence contract
volumes are lower than allocations. However, total actual contract volumes (60.8mmscmd)
are higher than 55.5mmscmd as they also include fallback volumes (which would not be
supplied in current lower gas supply environment). Current gas supply from KG-D6 is around
50mmscmd and RIL has consequently cut supply pro-rata to all its customers (implying
around 10% cut to every customer).
! In our last note on Petronet LNG (PLNG), U-turn, dated 14 March 2011, we had stated that
"we believe the Indian government (GOI) will be forced to cancel even existing contracts to
some non-fertiliser/power customers and reallocate the gas to new fertilizer/power units.
Customers in all other segments such as steel, refineries, petrochemicals, etc. would then
have no choice but to buy costlier imported LNG. This would be good news for PLNG since
these customers have far greater ability to pay than customers in regulated industries such as
fertilizer and power."
! Faced with lower domestic supply, GOI has already made its first move to reallocate existing
supply. As per Economic Times dated 8 April 2011, it has asked RIL to ensure that priority
sectors (defined as fertilizer, power, LPG and city gas) get their full contracted volume, with
balance sectors facing the brunt of the lower supply. In case gas production continues to
decline, RIL should impose cuts in the following order for priority: city gas, power, LPG and
fertilizer.
! We estimate that the priority sectors as defined by GOI would have firm contracts for
45.8mmscmd, with balance three sectors (refineries, petrochemicals and steel) getting
9.7mmscmd (RIL’s own allocation in that would be 4.3mmscmd). If the GOI directive were to
be followed, then the priority customers would get their full allocated supply, leaving
4.2mmscmd for non-priority (assuming KG-D6 gas supply is 50mmscmd). Hence non-priority
consumers would face supply cut of nearly 57% (supply of 4.2mmscmd against contract of
9.7mmscmd) as against just 10% if the supply cut is spread across all consumers.
! As per the Business Standard dated 14 April 2010, RIL has told GOI that it cannot comply
with its latest directive as its contractual obligation does not allow it to divert supplies from one
sector to another. We believe that GOI will use its powers to override the contractual
obligations of RIL. In fact, as we have stated above, we believe it could even cancel existing
allocations to non-priority sectors to accommodate additional demand from priority sectors.
! Our view is based on a precedent whereby GOI has changed existing contract terms to meet
its national objective. In CY07/08, customers were getting 5mt LNG from Ras Gas Qatar
whose FOB price was very low at US$2.5/mmbtu as per existing contract terms. An additional
1.5mt was needed for the Dabhol power project, which was available only at around
US$8/mmbtu. Since the Dabhol plant could not afford this high gas price, GOI resorted to
pooling whereby the weighted average price for the entire 6.5mt (around US$3.8/mmbtu) was
charged to all customers. This meant that existing customers with valid contracts for getting
LNG at US$2.5/mmbtu ended up paying around 50% higher FOB gas price to meet GOI’s
policy objective of ensuring affordable gas supply for the Dabhol power plant.
! Post the above policy change, the subsequent supreme court judgement in May 2010 in the
case between RIL and Reliance Natural Resources (RNRL) provides further powers to GOI.
The supreme court has ruled among other things that gas belongs to GOI and that the
production sharing contract between GOI and the contractor (RIL) shall over-ride any other
contractual obligation between the contractor and any other party (RNRL).
! As an aside, Indian Petro (a publication we subscribe to) recently reported that power
producers in Andhra Pradesh which are facing gas supply shortage are willing to pay for LNG
especially to meet the summer demand during the months of March to May 2011. For this
purpose, they have entered into a gas swapping agreement with GAIL. Since Andhra Pradesh
doesn’t have supply linkages with an LNG plant, the power producers would swap LNG
imported by them with GAIL’s KG-D6 allocation. This has been approved by the GOI.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Gas Utilities
Falling D6 prod improves LNG outlook
We maintain that falling dom gas prod will force govt to prioritise gas supply to
fertiliser/power sectors, forcing the rest (which have greater affordability) to buy
LNG. This would involve changing contract terms, but there is precedent of govt
doing that . PLNG (TP Rs150) remains key beneficiary of higher LNG demand.
! Gas consumers have been allocated 63.715mmscmd by the empowered group of ministers
(EGOM) from the KG-D6 block operated by Reliance Industries (RIL). We estimate that actual
contracts signed in relation to these firm allocations is around 55.5mmscmd (see table below).
Some customers with firm allocation are not in a position to take the gas and hence contract
volumes are lower than allocations. However, total actual contract volumes (60.8mmscmd)
are higher than 55.5mmscmd as they also include fallback volumes (which would not be
supplied in current lower gas supply environment). Current gas supply from KG-D6 is around
50mmscmd and RIL has consequently cut supply pro-rata to all its customers (implying
around 10% cut to every customer).
! In our last note on Petronet LNG (PLNG), U-turn, dated 14 March 2011, we had stated that
"we believe the Indian government (GOI) will be forced to cancel even existing contracts to
some non-fertiliser/power customers and reallocate the gas to new fertilizer/power units.
Customers in all other segments such as steel, refineries, petrochemicals, etc. would then
have no choice but to buy costlier imported LNG. This would be good news for PLNG since
these customers have far greater ability to pay than customers in regulated industries such as
fertilizer and power."
! Faced with lower domestic supply, GOI has already made its first move to reallocate existing
supply. As per Economic Times dated 8 April 2011, it has asked RIL to ensure that priority
sectors (defined as fertilizer, power, LPG and city gas) get their full contracted volume, with
balance sectors facing the brunt of the lower supply. In case gas production continues to
decline, RIL should impose cuts in the following order for priority: city gas, power, LPG and
fertilizer.
! We estimate that the priority sectors as defined by GOI would have firm contracts for
45.8mmscmd, with balance three sectors (refineries, petrochemicals and steel) getting
9.7mmscmd (RIL’s own allocation in that would be 4.3mmscmd). If the GOI directive were to
be followed, then the priority customers would get their full allocated supply, leaving
4.2mmscmd for non-priority (assuming KG-D6 gas supply is 50mmscmd). Hence non-priority
consumers would face supply cut of nearly 57% (supply of 4.2mmscmd against contract of
9.7mmscmd) as against just 10% if the supply cut is spread across all consumers.
! As per the Business Standard dated 14 April 2010, RIL has told GOI that it cannot comply
with its latest directive as its contractual obligation does not allow it to divert supplies from one
sector to another. We believe that GOI will use its powers to override the contractual
obligations of RIL. In fact, as we have stated above, we believe it could even cancel existing
allocations to non-priority sectors to accommodate additional demand from priority sectors.
! Our view is based on a precedent whereby GOI has changed existing contract terms to meet
its national objective. In CY07/08, customers were getting 5mt LNG from Ras Gas Qatar
whose FOB price was very low at US$2.5/mmbtu as per existing contract terms. An additional
1.5mt was needed for the Dabhol power project, which was available only at around
US$8/mmbtu. Since the Dabhol plant could not afford this high gas price, GOI resorted to
pooling whereby the weighted average price for the entire 6.5mt (around US$3.8/mmbtu) was
charged to all customers. This meant that existing customers with valid contracts for getting
LNG at US$2.5/mmbtu ended up paying around 50% higher FOB gas price to meet GOI’s
policy objective of ensuring affordable gas supply for the Dabhol power plant.
! Post the above policy change, the subsequent supreme court judgement in May 2010 in the
case between RIL and Reliance Natural Resources (RNRL) provides further powers to GOI.
The supreme court has ruled among other things that gas belongs to GOI and that the
production sharing contract between GOI and the contractor (RIL) shall over-ride any other
contractual obligation between the contractor and any other party (RNRL).
! As an aside, Indian Petro (a publication we subscribe to) recently reported that power
producers in Andhra Pradesh which are facing gas supply shortage are willing to pay for LNG
especially to meet the summer demand during the months of March to May 2011. For this
purpose, they have entered into a gas swapping agreement with GAIL. Since Andhra Pradesh
doesn’t have supply linkages with an LNG plant, the power producers would swap LNG
imported by them with GAIL’s KG-D6 allocation. This has been approved by the GOI.
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