Petronet LNG Limited (PLL), a New Delhi based company was incorporated in Apr’98 as a joint venture with equity participation from GAIL, IOC, ONGC and BPCL to cater to the natural gas demand supply deficit through imported LNG. Gujarat Maritime Board (GMB) granted PLL the right to develop a port for commercial use on BOOT basis and also build a solid cargo terminal alongside the LNG import terminal at Dahej. PLL successfully commissioned India’s first LNG receiving and re-gasification terminal of 2.5mmtpa in Feb’04 with capex of Rs20bn.

It further increased the capacity of Dahej terminal to 10 mmtpa in FY10 with additional capex of Rs15.7bn. Now with the rated capacity of 10mmtpa it can operate up to 11.5mmtpa. To tap the opportunity of growing demand-supply gap for natural gas in India, PLL is putting 2.5mmtpa re-gasification terminal in Kochi which will be expanded to 5mmtpa by FY15. GAIL, one of the promoters of Petronet LNG has doubled the capacity of its HVJ pipeline (off-take point for PLL-Dahej terminal) and laying Kochi-Mangalore-Bangalore pipeline (off-take point for PLL-Kochi terminal) which is expected to get commissioned along with commissioning of PLL’s Kochi terminal.

COST STRUCTURE

Petronet LNG is a bulk supplier of imported LNG which is re-gasified and transported through GAIL’s HVJ pipeline. LNG, which is the raw material for PLL, contributes ~98% of the operating costs, thus ~98% of the operating cost is variable cost. While PLL’s business model is completely based on long term contracts since the main objective is to meet a huge shortfall in natural gas supply in India, the high share of variable costs allows feasibility of business models catering to spot markets as well. Though PLL takes credit of LNG but its margins in absolute term are completely protected from increasing gas cost, as cost are passed through as per long term Gas sales agreement with off-takers.

INVESTMENT RATIONALE

Growing Demand-Supply mismatch in India
Robust GDP growth is resulting in increasing demand for energy in India. It is expected that for the decade energy requirement should grow at a CAGR of ~6% against historical average of ~5%. India's targeted ~8% GDP growth would entail near-doubling of energy consumption by 2020. As discussed in our sector report that contribution of natural gas is likely to increase going forward as current proportions of coal and oils are not sustainable on the back of availability issues and increasing subsidy burden. Natural gas is a preferred fuel over liquid fuel and hence has immense demand from all players like, power, fertiliser, industrial and CGD. Despite the increase in supply, demand is far likely to exceed supply.

LNG players: Positioned at right place at right time

Indian govt in their Hydrocarbon vision 2025 has highlighted their intention to increase the proportion of natural gas in energy basket. Allocation under NELP and conducive policy environment are the key developments in right direction. Despite recent domestic discoveries, demand is far ahead of supply. Slow ramp-up of RIL gas has further increased the concerns. In the current scenario, demand for imported LNG has surged in India and additional capacities are expected to tap this opportunity.

Increasing global LNG capacity to support further

Over the next 5 years, an incremental capacity of 80mmtpa is to be added, taking the total liquefaction capacity available to 306mmtpa. The majority of the incremental liquefaction capacity will come up in Asia, Africa and Middle-East. Meanwhile, over the next 5 years, 87mmtpa of regasification capacity is expected to be commissioned. Asia pacific and Europe are likely to be major demand driver in future. For next 5-6 years, liquefaction capacity is likely to be more than re-gasification capacity and augur for LNG availability in spot market and benign price environment.

Supportive USA dynamics

United States accounts for ~22% of total natural gas consumption in the world. It also accounts for ~5.3% of total LNG traded. With discovery of Shale gas technology, natural gas scenario is likely to ease in US. As per different international agencies, Shale gas has potential to contribute 1/3rd of total requirement by 2020. Higher availability of Shale gas in US should ease the pressure on global natural gas dynamics(US accounts for ~22% global consumption) and further support higher availability for LNG and benign price environment.

Aggressive capex plan to grab the opportunity

To tap the opportunity of demand-supply gap in natural gas market in India, Petronet is increasing its current capacity from 10 mmtpa in FY11 to 17.5mmtpa by FY15. Currently it has capacity of 10 mmtpa in Dahej which is operable at 11.5mmtpa. The company is putting a new R-LNG facility at Kochi with 2.5 mmtpa capacity expandable to 15 mmtpa. 1st stage of capacity is expected to come on-stream by Q4FY12 and complete capacity is likely by FY15. At Dahej, the company plans to increase capacity to 12.5 mmtpa. Robust demand and on-time capacity expansion should lead to higher capacity utilisation for Petronet.