• MARCH 14, 2007

GAIL: A brief overview...

With increased supplies from the private sector players, the Indian gas market is likely to see heightened activity over the next 4-5 years. Recent discoveries by Reliance, Gujarat State Petroleum Corporation (GSPC) and ONGC augur well for mid-stream companies such as GAIL, which is engaged in the transmission and distribution of natural gas in the country. With this background in mind, over the next few weeks, we will try to provide an exhaustive overview of the business operations of GAIL, with particular emphasis on how it has performed in the recent past, what would be the catalysts for the business and its future prospects.

About the company

GAIL is the country's largest gas distribution and transmission company with a pipeline network of over 5,600 kms across the length and breadth of the country. The company's HBJ (Hazira- Vijaipur-Jagdishpur) pipeline is the lifeline for major gas consumers like power and fertilizer units. The company has also ventured into upstream gas exploration business and is a participant in the gigantic Myanmar gas fields, which are likely to commence production in 2007. Given the fact that GAIL is largely dependent on ONGC for its gas requirements, the exploration business will decide to what extent the dependence reduces.

After huge discoveries in the West Coast in 70s by ONGC, bulk of the natural gas was allowed to flare, as there was no proper infrastructure in place to transmit the same. In order to effectively utilise the gas available, a separate transmission company in the form of Gas Authority of India Limited was established and its major role was to take the gas to the fertilizer and power plants. For this purpose, HBJ and other pipelines were laid. Thus, the key operations of the company revolved around designing and constructing pipelines and transmission of natural gas. Although it started off primarily as a gas distribution and trading company, GAIL, over the years has further diversified its business portfolio into a number of businesses, and following is a snapshot of its key businesses as they stand today:

  • Gas processing, gas cracking and production of LPG and liquid hydrocarbons: Rich natural gas is composed of four fractions (C1, C2, C3, C4) but the gas required by the power and fertilizer units need not to be a rich gas. Hence, to effectively utilise the various components of the natural gas, the company has set up fractionation and extraction facilities. GAIL has 7 gas processing facilities with an installed capacity of 1 MMTPA (million metric tonnes per annum).

  • Petrochemicals: GAIL has a plant in Uttar Pradesh, with an installed capacity of 3.3 MMTPA of polymers. Company has India's largest gas based petrochemical plant with an installed capacity of 3,10,000 TPA of polyethylene (HDPE, LDPE, LLDPE), which is undergoing expansion upto 4,40,000 TPA. GAIL is also working on two petrochemicals projects, one in Northeast and another in Kerala. It is also proposing to set up a plant in Iran.

  • City gas distribution: CNG (Compressed Natural Gas) as a transport fuel is much cheaper than Petrol and Diesel, and also less damaging to the environment. Thus, in order to tap its business potential, GAIL has ventured into city gas distribution JVs with various OMCs (Oil Marketing Companies). In Delhi, it has partnered with BPCL to establish a JV in the form of Indraprastha Gas Ltd. (IGL). In Mumbai, GAIL has partnered with BG (British Gas) for city gas distribution services. GAIL also has city gas distribution projects in Hyderabad, Argartala, Indore, Pune, Kanpur and Lucknow. India has significant under-penetration as far as CNG consumption is concerned. As per reports, India utilizes just 3% to 4% of the total gas available, while for other countries the share of city gas distribution is around 20%. Thus, the potential for growth is immense in this segment. GAIL has further identified 22 cities more for the city gas distribution venture.

  • Gas transmission and trading: GAIL is an operator and owner of India's largest gas transmission networks (5600 kms. of pipelines). It owns large networks like the world's longest exclusive Jamnagar-Loni-pipeline (1,269 kms) and Vizag-Secunderabad LPG pipeline (653 kms).

  • Upstream activities: GAIL has also forayed into the upstream segment with stakes in 13 blocks in India, two in Myanmar and one in Oman. While one of these blocks has already started producing oil, gas discoveries have also been confirmed in two blocks. GAIL is also planning to bid for CBM (coal bed methane) blocks in the near future.

  • Telecom: GAIL also has a small presence in the telecom sector via GailTel. The company has an optic fibre cable network of more than 9,000 kms that offer bandwidth as carrier's carrier in the telecom sector.

As seen above, the portfolio of the company appears well diversified with the majority of the revenues coming in from the gas transmission and trading business. For the nine month period ended December 2006, the revenue break-up was as follows: the natural gas transmission business accounted for 11.6% of the revenues, LPG and liquid hydrocarbon (11.3%), natural gas trading (60.4%), petrochemicals (12.2%), LPG transmission (1.7%) and the remaining was accounted for by others.

While the natural gas trading and transmission business is a stable one with visible cash flows, the risk are on the higher side in the commodity business such as liquid hydrocarbons and petrochemicals.

In the next article, we will take our analysis of the company a step higher.

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