LNG prices will remain depressed for some time

             Petronet LNG Ltd is perhaps the only company not cheering the increased availability of cheaper domestic gas. In the price game, its costlier, regassified LNG loses. In an interview with Ajay Modi and Jyoti Mukul, its new managing director and chief executive officer, A K Balyan, sees the LNG business growing in the coming years, even as his company is planning diversification into power and city gas distribution. Edited excerpts:

Internationally, the gas market, especially the LNG business, is going through a glut phase. How long do you think the market will remain depressed?

 We need to look at the entire oil and gas business together. After the so-called high in the sector, oil prices have more or less stabilised in the range of $70-80 a barrel. World-wide, more and more finds in the hydrocarbon sector are gas finds. Besides, the traditional big gas producers, like Qatar, which will do an all-high of 70 million tonnes of LNG, have added more capacity. Algeria, Russia, Australia, Indonesia have created more capacity.

 On the other hand, the major global consumers ? US and Europe ? have been able to replace the traditional gas with alternate sources. Today in the US, as much as 20 per cent of gas comes from shale. Approximately 10 per cent comes from coal bed methane. This has had an impact on the LNG market. Besides, the US has a wonderful gas grid; any operator can pump in gas from anywhere. Big LNG markets are emerging in India and China. With new capacity coming up and demand not growing in Europe and the US, LNG prices in the spot market are depressed and are going to be so for some time.

 Is long-term LNG not available right now?

That is right. Both consumers and producers are trying to take advantage of short-term and spot contracts. From the seller point of view, they would like to have good price and they are hoping this low in prices gets over. More and more gas is available in the floating cargo.

India was to get LNG from Iran but that country has not been able to develop its LNG business. How far will gas from Iran impact the market in future?

Iran is bestowed with a huge quantity of gas. South Pars is a contiguous basin they share with Qatar. Because of the US sanctions, they are not able to develop the gas industry, particularly LNG industry. It is understood they have definite plans to establish four LNG terminals and we are told they have awarded a few contracts for construction of the first two trains. They have developed a mechanism to take the help of non-US companies, perhaps from Japan, Korea, China, Taiwan.

Iran is keen to move into the LNG sector because it is one thing that will give them tremendous clout in the global market. The natural market for them would be the Asian one. From the Indian perspective, it is very important that Iran LNG should come up. Then, prices will be very much in control.

Since India has a good domestic supply of natural gas, how far is LNG competitive and will PLL be able to maintain its share of business?

We have gas supply of up to 140 million standard cubic metres a day (mscmd) from domestic sources. Additional gas in future is likely to come from Reliance Industries, ONGC, GSPC, which might take domestic supply to 170-175 mscmd by 2015-16. In India, there is a huge demand, with the government having requests for some 500 mscmd of gas. We must have several D6 discoveries and several Bassein fields to meet this demand and that is not going to be easy.

PLL has a 20 per cent share in the gas market. Gas availability through the LNG route is going to be one area of growth in the coming years. We are setting up our next terminal at Kochi, with a 2.5-million tonne per annum capacity. We have already signed a long-term contract with Exxon Mobil for LNG from the Gorgon field in Australia and there is a possibility of contracting more. From PLL?s perspective, our share in the gas business is going to increase. The issue is that we have to get the best price for Indian industry. We would like to pursue some of the opportunities abroad and get the best price, so that PLL remains competitive in the Indian market.

Where will the gas demand come from?

Companies which are using naphtha and furnace oil are more than willing to switch to gas, a cleaner fuel. To my mind, gas would become the preferred fuel in all sectors of the economy. I am sure that with the Kochi terminal, the gas market in the south is going to develop and more and more demand will come.

When are you commissioning the Kochi terminal?

We hope to do it by the middle of 2012. Gas contracts are in place and we have already signed firm offtake agreement for 1.44 mscmd gas with GAIL and most of this has already been tied up. This will be consumed by fertiliser units, a BPCL refinery and other industrial units and possibly by NTPC?s power plant. This will give a major fillip to industrial activity in the region. We are assessing additional demand and then we will go for contracting more quantities. It would depend on pipeline projects in the region.

Will the landed price of gas at Kochi be different from Dahej?

Kochi will definitely be more; for Dahej, we had managed a much better deal. It is going to be approximately 14 per cent slope to the Japanese Crude Cocktail pricing.

Has the issue of pricing and pipeline connectivity hampered growth of the LNG business in India?

The LNG business is highly dependent on pipeline networks and presently we do not have an extensive one in the country to move gas from one region to the other. Pricing has to evolve over time. Everybody would like to have cheaper gas. And, several companies had expressed a desire to move to D6 gas but now that availability is limited. There is no other gas available. It has to be through LNG.

India is unique in terms of multiplicity of gas pricing. The government is rightly looking at a pooled price (involving both domestic gas and imported LNG), which would pave way to working out a mechanism for affordable gas prices. This would be beneficial for PLL. Do you have plans to venture into city gas distribution?
We are open to collaborate with other companies, since we do not have direct retailing experience.

What are the other diversifications PLL is planning?

We would like to be a major player in the gas business. We are targeting to double our present share of 25 per cent in the next seven-eight years. One area we are closely examining is power. We have the advantage of using the cold energy. We are undertaking the feasibility study for a power plant at a Dahej terminal. It will take two to three months. We will also look at stepping up a similar plant in Kochi.

We would be looking at mega power plants of about 1,000 Mw, which on a thumb rule may require an investment of '4,000-4,500 crore. We are confident we would be perhaps one of the most competitive of power generators, since there would be no transportation cost in gas and there will be an upside of 8-10 per cent from cold energy. It would primarily be a merchant power plant.

Source: Ajay Modi & Jyoti Mukul / New Delhi August 16, 2010
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