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GAIL: Gains in the 'Pipeline'! - Views on News from Equitymaster
 
 
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  • Mar 21, 2007

    GAIL: Gains in the 'Pipeline'!

    In the previous article, we had provided a brief history on GAIL and an overview of the business of the company. Taking our analysis further, in this write-up, we analyse the performance of the company over the last few years with respect to its key business of transmission of natural gas and LPG. We will also have a look at what are the potential catalysts for the transmission business of the company.

    Performance appraisal and catalyst for the various businesses

    Transmission and trading business: During the last five years (FY01 to FY06), GAIL has commissioned 5 major pipeline projects involving an outlay of Rs 41.4 bn against approved cost of Rs 51.1 bn.

    Major pipelines accomplished are as follows:

    • Jamnagar - Loni LPG pipeline.
    • Lanco- Kondapalli pipeline
    • Vizag Secunderabad LPG pipeline
    • Dahej Vijaipur pipeline.
    • Thulendi- Phulpur pipeline.

    Company has shown good skills on the execution front as the cost of the projects was kept under check by executing the projects within a specified time frame. Amongst the pipelines laid in last 5 years, only Thulendi- Phulpur pipeline was executed beyond the scheduled deadline.

    On the capacity utilisation front however, the performance continued to be subdued for the company.

    Capacity utilization over last few years...
    Capacity utilization FY04 FY05 FY06
    Natural gas pipelines 60% 55% 61%
    LPG pipelines 74% 58% 61%

    Capacity utilization for the natural gas pipelines has not increased over the last three years. This is inspite of the gas supplies from the Petronet LNG terminal in FY06. The major reason behind the lower utilization can be traced to lack of sufficient gas available from the main producer, ONGC.

    For the transportation of LPG, GAIL has two major pipelines, the Jamnagar- Loni pipeline and the Vizag- Secunderabad pipeline (VSPL). While the utilization level of the Jamnagar pipeline is pretty high, the utilization of Vizag Secunderabad pipeline is around 30% to 40%. Non-utilization of the pipeline capacity to the fullest possible extent can be attributed to lack of import of full LPG on the back of inadequate LPG storage available at Vizag. Therefore, Oil marketing companies (OMCs) are forced to source part of their LPG requirement through rail or road in order to avoid high fixed costs associated with below capacity gas transmission.

    VSPL, commissioned in 2004, has a capacity of 1.33 MMTPA (million metric tonnes per annum). OMCs are currently meeting 75% to 80% of their total LPG requirement through the VSPL pipeline.

    Catalysts for the business:
    Country has witnessed significant gas discoveries in the recent past with large discoveries by Reliance, ONGC, and GUJ. STATE PETRONET (GSPCL). GAIL, being a mid stream company is bound to benefit from these discoveries. Reliance, which is going to start commercial production from FY09, is going to utilize Gail's pipelines for transmission of its gas. Thus, we expect a significant improvement in profitability, as higher volumes will directly flow to the bottomline. Additional volumes could come from Petronet LNG, which is in the process of significantly ramping up its capacity.

    Cross border gas pipelines (Iran- Pakistan- India (IPI) pipeline and Myanmar pipeline), which are currently in the early stages of discussion are also likely to turn into a reality but the benefits to GAIL are only likely to accrue in the long term. Given the fact that gas to be transmitted from Iran could be in the region of 60 MMSCMD (million metric standard cubic meters per day), which is more than 75% of the current transmission and trading volumes of GAIL, its profits would receive a big boost. However, even in a best-case scenario, the pipeline is not expected to be up and running before FY11.

    Capacity utilization of LPG pipelines is also bound to improve significantly with various measures taken by the ministry. HPCL, along with TOTAL of France is setting up a 60,000 MT LPG cavern storage facility at Vizag. This move is going to augment the LPG availability at Vizag through receipts of large import parcels, thereby providing increased LPG to improving the utilization of VSPL. Also, there will be no 'take or pay' obligation for OMCs to transmission of LPG, which is again going to increase the capacity utilization of VSPL. GAIL is also exploring the possibilities for transporting petroleum products via VSPL, thus increasing the capacity utilization by making it a multi-product pipeline.

    However, despite the huge growth prospects, GAIL's market share in the natural gas transmission is likely to decline in the times to come. This could be attributed to major pipeline activity of its competitors, Reliance Industries in particular, from FY09 onwards. During FY04, GAIL transmitted more than 62 MMSCMD of gas (90% market share). The market share declined to 88% of the total gas transmitted in the country (72 MMSCMD of gas) in FY05, and further to 86% (79 MMSCMD) in FY06. The trend is expected to continue going forward as well, however, the increased domestic supplies are likely to fuel growth in the business.

    GAIL is also not sitting idle and proposes to strengthen its core natural gas transmission business by building key inter-state truck pipelines, which is going to increase the total network to 12,000 kms (an increase of more than 2 times from the current capacities).

    Last but not the least, with the government imparting infrastructure status to pipelines in the current budget, it is being believed that it also wants to go all out in tapping this source of energy, especially in view of the shortage of other cheaper form of energy and the enormous demand potential. Hence, we believe this could turn out to be a huge opportunity for mid stream players like GAIL.

     

     

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