Expensive LNG via long-term deal a major concern for GAIL

By: | Updated: April 21, 2015 1:25 AM

GAIL (India), the country's largest gas transmission and marketing company, is under stress as liquified natural gas (LNG) procured...

GAIL, GAIL India, liquified natural gas, LNG, GAIL LNGAccording to GAIL, the dramatic fall in global oil prices over the past few months has affected the oil and gas industry worldover. (Photo: Akash Sinha)

GAIL (India), the country’s largest gas transmission and marketing company, is under stress as liquified natural gas (LNG) procured via long-term contract has turned out to be expensive than spot buys with no takers for the gas. Left with no option, the PSU has to utilise the expensive gas for its own petrochemical plant leading to fall in margins. With the scenario not expected to change any time soon, GAIL’s longer-term growth trajectory is also under cloud, feel analysts.

According to GAIL, the dramatic fall in global oil prices over the past few months has affected the oil and gas industry worldover and it is no exception. “As LNG prices are linked to oil prices, the spot prices have also reduced drastically, and this is definitely a major challenge for GAIL because we import most of our LNG through long term contracts which are costlier at the moment,” the company spokesperson said in response to FE queries.

Industry watchers say that over the past few quarters, the spot price for LNG has dropped to around $7-8/mBtu (this is landing cost; excluding re-gassification, transportation and marketing margin charges), while the price for long-term LNG supply still hovers more than $11/mBtu.
In Q3 FY15, GAIL saw revenues from all segments dipping except petrochemicals. Its net profit drastically dropped 64% year-on-year. The firm’s polymer business faces both revenue and cost pressure, as prices have fallen with crude. In addition, feedstock cost for GAIL has increased, and is likley to remain high. GAIL has lost allocation of cheap domestic gas from RIL-operated KG-D6 block for its petrochemical business and has replaced that with LNG.

GAIL-graph

“These issues now seem likely to persist for a while. Chemical capacity expansion can only add to troubles. Government policies on subsidies for power and gas pooling for urea may assure some volumes for GAIL, but the company may have to forego some margins, and Ebitda (earnings before interest, taxes, depreciation, and amortisation) addition could be just 3-5%. Even with an elimination of subsidy payments, GAIL’s profit after tax (PAT) can decline year-on-year in FY15/16,” said Sanjay Mookim and Badrinath Srinivasan of Credit Suisse Securities Research & Analytics.

The 7.5 million tonne LNG from Rasgas procured by Petronet LNG (of which GAIL is liable to take 60%) on take-or-pay basis is now expensive.

This is because it is linked to 60-month average of crude oil prices. The company is unable to find other buyers for Rasgas volumes and, therefore, not able to replace it with cheaper spot LNG.

“The only hope of improving profitability of the petrochemical segment is to divert some of the expensive Rasgas LNG to other customers, and for GAIL to start using cheaper spot LNG instead,” said Mookim and Srinivasan in their report.

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