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GAIL: The LPG angle - Views on News from Equitymaster

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GAIL: The LPG angle

Aug 21, 2007

In our previous articles (GAIL overview), we presented a brief overview of the various segments of GAIL and covered the transmission segment and its catalysts in-depth. In this article we’ll take a look at the LPG and other liquid hydrocarbons segment of GAIL The segment contributed 14% of the topline and 26% of the bottomline in FY07. LPG constitutes 80% of the segment. In FY07, GAIL produced 1.026 million metric tonnes (MMT) of LPG. It transmitted 2.49 MMT of LPG (up 12% YoY).

Uses
Liquefied Petroleum Gas ("LPG") comprises of C3 (Propane) and C4 (Butane). It is produced from either crude oil in the refining processes or from natural gas in gas processing by fractionation. LPG is a premium quality fuel and is used as domestic cooking, industrial and automobile fuel. It is also used as feedstock for petrochemical production. More than 90% of LPG consumed in India is used for domestic cooking fuel. The balance is used primarily for industrial heating and commercial establishments such as restaurants and hotels. LPG is supplied in cylinders to households and commercial users while industrial users generally obtain LPG in bulk.

Infrastructure
GAIL operates seven natural gas processing plants with an aggregate installed capacity to produce over 1 million tonnes per annum of LPG. The Vijaipur, Vaghodia and Pata plants are located along the HVJ pipeline. Plant availability is over 96% at most locations.

Location Production (mmtpa)
Vijaipur (2 Nos), MP 406,000
Auraiya Pata, UP 258,250
Gandhar  Gujarat. 207,000
Vaghodia, Gujarat 73,000
Usar, Maharasthra 139,500
Lakwa, Assam 85,000
Total 1,168,750

Pipelines supplement or replace the transportation of LPG by road and rail, which are expensive and hazardous modes of transportation. The company has 1,243 kilometers (km) of pipeline dedicated to transporting LPG from Kandla and Jamnagar in the west to Loni in the north at a total project cost of Rs 12 bn. It has a capacity of 2.5 mmtpa. The company also has a 1.33 mmtpa, 600 km pipeline between Vizag and Secunderabad, which was built at a cost of Rs 5 bn.

Customers
The company is currently not allowed to sell LPG directly to end consumers. It sells LPG to PSU Oil Marketing Companies namely IOCL, BPCL, HPCL and IBP Ltd as directed by the MoPNG at import parity prices. These oil companies then market the gas to end consumers. The company has applied to the petroleum ministry for permission to start marketing of LPG to non-domestic customers and later to domestic customers as well. The request is under consideration. If and when approval is granted, GAIL’s experience in marketing propane and petrochemical products directly to customers and providing customer service in relation to these products will allow it to quickly and efficiently increase its sales of LPG.

Suppliers
GAIL itself supplies natural gas to the two Vijaipur plants, the Vaghodia plant and the Pata plant through the HVJ Pipeline. ONGC supplies natural gas to the Usar plant and the Lakwa plant through Regional Pipelines. Natural gas is supplied to the Gandhar plant from both the HVJ Pipeline and the Baruch Regional Pipeline.

Competition
PSU refineries and fractionators account for almost 69% of LPG production and LPG marketing is entirely dominated by PSU Companies with almost 96% of the total market share. Due to the primacy of LPG in domestic fuels, the industry has been regulated in terms of retail prices. Moreover, the government currently imposes custom duties on the import of LPG. However, private sector suppliers may import, produce and market LPG at free market pricing if the infrastructure for importing LPG is made available.

Future outlook
There is a substantial gap in the LPG demand-supply in the country. The gap in consumption and domestic production is currently being met by imports. Domestic use of LPG accounts for 92% of total consumption while remaining 8% is accounted for by commercial and industrial uses. Currently, there are roughly 85 million customers for LPG, out of which around 70 million are urban customers, thus rural area may emerge as a lucrative market for LPG penetration. LPG demand is also expected to be driven by the substitution for SKO (Kerosene) as domestic fuel.

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