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Will it become a force to reckon with? - Views on News from Equitymaster
 
 
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  • Jun 9, 2001

    Will it become a force to reckon with?

    Integrated energy companies, especially in the upstream sector, never had it so good with energy prices hitting the roof in year 2000. British Gas, the integrated gas major, must have been smiling all the way to the bank after reporting a financial performance par excellence. Reporting an equally strong performance was the global major's Indian subsidiary Gujarat Gas Company Ltd.

    British Gas owns sixty percent of the Gujarat Gas Company. In fiscal 2001, the company reported record gas sale volumes and turnover. Company sales stood at Rs 308 million ($6.6 million), a growth of 21 percent while gas volumes rose by a more sober 7 percent to 349 million metric standard cubic meters (mmscm). In light of the robust topline growth the bottomline also surged 27 percent to Rs 48.6 million ($1 million).

    The prospects for Gujarat Gas Company seem to be brightening as gas replaces other conventional sources of energy as the most preferred fuel both in the international as well as domestic markets. In fact, activity in the Indian market is heating up with the Government requesting bids for oil & gas exploration blocks, companies planning constructing of gas terminals and gas transportation companies building pipeline networks. Gujarat Gas has already set up a pipeline network of 1,500 kilometers (kms) in the state of Gujarat. In fiscal 2001, the company has expanded the pipeline by 167 kms including the 73 km HAPi pipeline extending from Hazira to Ankleshwar. This belt is considered to be a highly industrialized zone and therefore has higher consumption needs.

    The company has entered into an agreement with Gujarat State Petronet Ltd. (GSPL) to transport 0.5 mmscm per day (mmscmd) of gas, along the HAPi pipeline, starting from the second half of the current fiscal. Another deal, commencing in the same period, has been with Search Chem to supply 0.23 mmscmd of gas. Consequently, the company is expected to maintain robust growth in gas sales this fiscal. The company supplies piped gas to domestic, commercial and industrial users in Surat, Ankleshwar and Bharuch with an aggregate customer base in excess of 120,000.

    GGCL Customer Base
    (Nos) FY00 FY01
    Commercial 1,467 1,619
    Industrial 373 408
    CNG 724 908
    Domestic 107,611 118,642

    GGCL Pipeline Network
    (Kms) FY00 FY01
    Mild Steel  258 261
    Poly Ethylene 1,076 1,240

    With a clear focus on growth the company has identified marketing of compressed natural gas (CNG) as a new thrust area. CNG is a green vehicle fuel as its carbon monoxide emission levels are the lowest compared to other transport fuels. Consequently, the Government is promoting CNG use. In fact, the state Government has offered free land to Gujarat Gas for setting up retail outlets to cater to the transportation sector. Also, the Central Government is contemplating on waiving sales tax on CNG. However, in Budget '02, the Government imposed 8 percent excise duty on CNG. Also, the high cost of conversion kits and lack of retail outlets is limiting motorist from switching to the green fuel.

    Although demand for natural gas far out-matches supply by an estimated 4 times, all is not hunky dory. The large mismatch itself is an indicator of the supply constraints existing in the industry, limiting growth of the transmission & distribution companies. With Gujarat Gas already setting up pipeline assets it now requires the gas to make these assets productive. British Gas is negotiating with Cairns Energy, which has struck gas in the Gulf of Khambat, to supply the maximum available gas to its Indian subsidiary. The oil & gas field is estimated to yield 2 mmscmd of gas. Gujarat Gas currently has access to 1.2 mmscmd of gas supplies. Gujarat State Petroleum Corporation Ltd. (GSPCL) supplies 0.7 mmscmd while Government-owned competitor, Gas Authority of India (GAIL), supplies the remainder. The deal with Cairns Energy could provide a big boost to the company's sales as it would double available gas supplies and augment operating capacities of the pipeline.

    A significant blow to the company's pipeline expansion plans has been Gujarat Government's appointment of GSPL as the sole agency for establishing a gas grid in the state. Although Gujarat Gas has been offered a stake in GSPL the company will require a no-objection certificate (NOC) from the sole agency for developing competing pipelines.

    The State Government is also contemplating licensing of distribution. Consequently, any expansion plans in the gas distribution business will entail the company to bid for the respective circles. Currently, the company is not offering services in two of the main cities of Gujarat, Ahemdabad and Baroda.

    While concerns on the external environment remain the company has reported a strong financial performance in fiscal 2001 and is expected to continue with the robust growth in the current fiscal. As the demand - supply mismatch is overcome the company could stand to be among the larger beneficiaries.

     

     

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