Petronet LNG hopes to ride the expected boom in LNG capacity in India.  Amitava Sengupta (Director, Finance & Commercial) elaborates


Tell us about the current global LNG scenario. What kind of changes do you see in the way business is shaping up over a period of time?

LNG is nothing but natural gas. Just for transportation purpose, we need to liquefy it. Natural gas demand is increasing throughout the world, thanks to two reasons. Firstly, it is very clean fuel and secondly, wherever it is used, the efficiency improves. Today, there are three distinct LNG markets in the world. Asia Pacific includes Japan, Korea, Taiwan, China and India. Then there are the European and the US markets.

Over the next 10 years, while the global LNG supply will double, we believe both Europe and the US will get flooded by piped natural gas. Europe already has pipelines supplying gas from Russia, while another one is being built from Algeria in North Africa to Italy. Similarly, Nigeria is likely to get connected with Europe soon. Across the Pacific, the US is witnessing growing natural gas supplies from Canada.

These pipeline projects will stagnate the LNG demand in these regions over a period of time. As a result, the Asia Pacific region will emerge as the major demand hub for LNG. Even logistically, this region is placed favourably with regard to the two major LNG producing hubs ? Middle East and Australia. Over the next 10 years, Australia is likely to emerge a major LNG supplier with a liquefaction capacity of around 50 million tonnes.

Gas availability in India is likely to go up substantially in the next few months. In such a scenario, will there be sufficient demand for costly LNG?

It is true that the availability of gas will go up in future. However, the main question is: by when and how much. If the availability increases by say, 120 million standard cubic metres per day (mmscmd) of gas within the next one year, then, yes, we will have a lot of competition. However, if it goes up in phases over a period of 2-3 years, the likely growth in demand will be higher.

Our estimates, as well as the government?s data, show that by ?12, the domestic demand for natural gas will be 283 mmscmd and domestic supply will be 180 mmscmd. Hence, imported gas will have to fill up the gap, which is huge. Again, if there is any problem in the short term, it will only affect the spot cargos, because our longterm contracts have back-to-back long-term sell arrangements.

You are doubling your current LNG capacity to 10 million tonnes by next year. What is your strategy to ensure sustained capacity utilisation?

The expansion of our Dahej terminal will be completed by the end of ?09. We already have a 7.5-mtpa contract with RasGas, of which, 2.5 mtpa will start flowing in when the expansion is over. We have also approached various other suppliers for middle-term contracts and we are hopeful of securing some of them. Otherwise, the spot cargo potential is always there.

Hence, I don?t think Dahej will remain under-utilised at all. For long-term contracts, we will import only if we have back-to-back sell agreements, as the exposures are very high. However, in future, we will not book our entire capacity with long-term contracts, which takes away flexibility from the business. When the volumes are very high, any downstream disturbance may have high repercussions, as all our contracts are take-or-pay contracts.

When will the RasGas contract come up for price revision? Considering the current high energy prices, what will be the likely impact?

It?s due on January 1, ?09. However, it?s not price revision. The formula remains the same for 25 years, which is linked to Japanese Crude Cocktail (JCC). It?s just that for the first five years, the reference JCC price was fixed at a certain level, which will go out from ?09 and the formula will be followed.

However, there is a cap and a floor price, so it will remain within that. Similarly, the five-year average JCC price is taken for reference. Hence, the current spurt in energy prices won?t have any immediate impact on the LNG contract prices. At the same time, thanks to the back-to-back selling arrangements, we won?t see any change in volumes.

What is the current status of your Kochi LNG project? Have you tied up for the LNG supply? What kind of return on capital do you expect from it?

We have already started awarding contracts for the 5-mtpa Kochi LNG terminal, which is scheduled to come up by end of ?11. We have split up the entire project into three distinct parts, viz, storage tanks, marine work and vapourisors. Since the storage tanks are highly specialised equipment, we have already placed orders for the same. For the other two facilities, we will award contracts through a global bidding process by the end of the current year.

FOR THE LNG supply to Kochi, we have had long negotiations with Exxon Mobil for its share from the Gorgon LNG project in Australia and have submitted our final price quote. We are highly hopeful of securing the contract.

There are two aspects to return on capital. Firstly, the capital cost will be higher, at around $650 million, for the Kochi terminal, compared to around $400 million for the first phase of Dahej.

Secondly, our earnings will depend on the volumes we handle or capacity utilisation, since it is just the regasification margins that we earn.

However, Kochi and the nearby areas lack pipeline connectivity and hence, our LNG won?t have much competition, thus enabling us to utilise full capacity. All in all, we may not be able to sustain the current RoCE of above 25%, but it will remain healthy.

What kind of synergies do you expect from your latest venture in power generation?

We are proposing to set up a 1,200-mw power plant in Dahej near our LNG terminal at a capital cost of Rs 3,500 crore. We have inherent strategic advantages for entering the power generation business, thanks to the availability of ?cold energy.?

We will be setting up three 350-mw turbines totalling 1,050 mw, but our output will be 1,200 mw. LNG is transported and stored at temperature as low as minus 160 degree Celsius.

Hence, when it gets regasified, it brings down the temperature of water to zero.

This water is then used for cooling in turbines improving their efficiency. Besides the savings of 12.5% value-added tax (VAT) on fuel, this will ensure that our power will be the cheapest among all gas-based projects in India.

We are currently waiting for the state government to allocate us land to set up the power plant.

Currently your debt-equity ratio is above 1. How do you plan to finance new projects, including the Kochi terminal and the proposed power plant?

For us, the acceptable level of debt-equity ratio is 2.3, so we have huge borrowing capacity. At present, we can borrow around Rs 2,200 crore, while internal accruals will contribute another Rs 500 crore every year. Hence, financing the new projects will not be much of a problem for us.

Source: The Economic Times, Delhi, July 07 2008
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