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Energy: A paradigm shift? - Views on News from Equitymaster
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  • Feb 13, 2004

    Energy: A paradigm shift?

    Amongst the slew of public issues likely to hit the market in these last two months of FY04, ONGC and GAIL are undoubtedly the biggest. Further, post the successful listing of Indraprastha Gas (IGL) (108% since listing) on the bourses, Petronet LNG is also slated to hit the markets next week. Against this backdrop, we take a look at the energy sector, natural gas in particular, and its prospects going forward.

    The energy needs of a developing country like India are huge. Despite being the seventh largest consumer in the world, per capita consumption of energy compares poorly with those of other nations. However, since a majority of the country's energy demands are met by imports, it puts an enormous amount of strain on the country's import bill. It is estimated that the imports of crude oil alone accounted for Rs 840 bn (US $18 bn), a huge 70% of the total crude oil consumption in the country in FY03.

    Such a large dependence is therefore detrimental to the energy security of the country. Aware of this, the government is going all out to reduce this over dependence and it has initiated several measures on this front. Through PSUs like ONGC (105%), it has started bidding aggressively for offshore oil fields and has also started giving out exploration licenses to private sector and foreign players along the country's vast coastal belt.

    However amidst all this, one event that really has the potential to bring about a paradigm change in the country's energy needs, is the huge gas find by the private sector giant Reliance (estimated to be 12-14 trillion cubic feet) in the Krishna Godavari basin off the eastern coast of the country. Further, the public sector behemoth, IOC (200%), is also getting serious about the gas business. The company is contemplating to acquire stakes in gas blocks both in India and abroad. Moreover, the government is also trying to build a huge gas pipeline from Iran to India to meet the demand.

    It seems that India is finally going the global way in terms of energy consumption patterns. As is evident from the figure below, over the last 20 years, contribution of gas towards fulfilling world's energy needs has increased by almost 600 basis points. However, in India, the share of natural gas is only 8% as compared to 55% of coal and 31% of oil.

    But this figure is likely to change following a couple of developments in the Indian energy sector. Gail (222%), India's largest gas distribution company has already started work on constructing a national gas grid crisscrossing the nation's entire landscape. The company hopes the same to achieve full level of operational capability by 2008. Also, Reliance Energy, one of India's leading power companies, has announced plans to set up a huge 3,500 MW gas based power plant in the state of UP, courtesy its huge gas find. Taking into consideration the cost effectiveness of gas based power plants and almost negligible emissions of pollutants, more companies are likely to follow suit.

    In India, power and fertilizer companies are the primary users of natural gas. It is estimated that these two industries account for close to 78% of total gas consumption. However, once the proper infrastructure is in place, their contribution is likely to reduce and other industries as well as households will also emerge as gas consumers.

    It is being observed that the use of gas as a natural source of energy depends to a great extent on the infrastructure available, especially, pipeline networks. If such networks are built then natural gas has the potential to emerge as a highly competitive substitution to liquid energy sources. This is likely to generate investor interest among companies like Gail and Petronet LNG and to a certain extent, Reliance Energy, whose fortunes are dependent upon this source of energy.

    Note: The percentage figures in brackets indicate the appreciation of the stock in the last one-year. The Sensex during this period has risen by 83%.



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