Petronet LNG: Targetting Rs 7500 crore worth of spot cargo business for FY 08

P Das Gupta, MD & CEO, Petronet LNG said that they do not see any problem of oversupply of gas. They have the endeavour to supply 10 mmt of gas by 2008-09. The company is also open to reduction in tariffs depending on the market demands. The company sees no problems of capacity utilization from even post KG Gas.

 

The volumes for FY 08 will be 6.5 mn metric tonnes and 10 mln metric tonnes will be volumes for FY09. They have concluded all agreement from Ministry of Shipping for Kochi terminal and the deadline is Oct 15. They have started talking to players for contracts. For FY08 Rs 7500 crore worth of spot cargo business is targetted.

 

"Going forward I do not see any problems of selling gas; every molecule of gas is going to sell the only difference it will make is that the cheaper gas will go out first and the more expensive next and to that extent therefore LNG plays very significant role provided one has storage capacity," Dasgupta said.

 

In the Q1 FY08, net sales of Petronet LNG were at Rs 1551.02 crore from Rs 1019.08 crore and net profit was at Rs 108.02 crore from Rs 56.08 crore. Other income stood at Rs 11.58 crore from Rs 5.28 crore. Operating Profit Margins were at 13.2% vs 12.8%. Gas processed and sales volumes were up 18.5% to 78.62 TBTUs.

 

The key drivers to the growth were regassification tariffs and volumes as well as marketing margins, debottlenecking of the Dahej Terminal, which led to higher use of spot cargoes; spot cargoes have higher margin and Dahej Terminal capacity utilisation which is likely to decline post 2009-10 as KG gas kicks in.

 

- Enters into term contract for sourcing additional 1.25 MMT of LNG with RasGas, Qatar. This is expected to increase the gas tariff going forward
- Higher Regas tariff from Dahej terminal to be negative for the company
- Dahej capacity increased to 6.5mt at minimal cost:

 

In FY06, PLNG managed to de-bottleneck the terminal, boosting capacity from 5mt to 6.5mt with virtually no additional capex. This capacity has been used to bring in spot cargoes of LNG. Spot cargoes commenced from 1QFY06 (3.2trn btus) and have risen steadily rising since then (each cargo has an average size of 50,000-60,000 tonnes of LNG; 1mt equals 52trn btus). In FY07, PLNG processed 13 cargoes, which is likely to double to 24 cargoes in FY08.

 

Under the current GSPA, the regas tariffs were set at Rs 23.7/mmbtu (about US$ 0.50/mmbtu) for 2004, rising by 5% pa. Consequently, rates for 2007 are Rs 27.44/mmbtu (about US$ 0.67/mmbtu). These rates were based on capital costs for the initial 5mt capacity. Though the capacity has been increased by 30% to 6.5mt without any additional capital costs, there has been no downward revision in the regas tariffs and all additional spot cargoes earn the same level of regas tariffs if PLNG can process an additional 1.5mt, it can earn an additional revenue/pre-tax profit of Rs 2.1 billion at current regas rates (excluding marketing Margins).

 

Since the Dabhol LNG terminal is not yet ready, as the breakwater facility is not yet built. All LNG cargoes meant for Dabhol will be processed at PLNG's Dahej terminal and transported via GAIL's Dahej-Uran- Dabhol pipeline, which has just been completed. PLNG has contracted to supply 1.5mt pa to RGPP up to September 2009 and in turn has managed to source 1.25mt pa from Ras Gas Qatar for July 2007 to June 2008. PLNG expects Ras Gas to renew this short-term contract. The balance sourcing requirement (0.25mt) will be met through the spot market.

 

The current FOB price of long-term LNG sourced from Ras Gas is US$ 2.53/mmbtu,whereas the spot cargoes meant for Dabhol would cost nearly US$ 8/mmbtu.

 

Spot LNG cargoes are highly profitable: Long-term volumes provide base for ops, the real upside is being provided by short-term/spot volumes. For long-term volumes, PLNG needs the financial backing of its offtakers and hence can earn only its basic regas tariff. When the regas terminal is up and running, it can be leveraged to bring in spot volumes, which PLNG can then fully control. These spot volumes generate regas income (currently US$ 0.65/mmbtu) as well as marketing margins (US$ 0.2- 0.5/mmbtu). Nearly 1.5mt of spot cargoes likely to be processed in the next 12 months would generate revenues of Rs 345 crore vs base revenue (regas only) of Rs 700 crore from the initial 5mt long-term contract. In FY08, nearly 45% of projected pre-tax profit is being generated by the spot cargoes.

 

Business rick likely to go up Long-term LNG sourcing has remained unchanged in the past 3 years at 7.5mt, whereas PLNG is increasing regas capacity to 15.5mt, thereby raising the risk of low capacity utilisation and hence poor profitability. But the fact remains that while capacity will be raised to 13mt, gas sourcing to date is restricted to just 7.5mt. PLNG's strategy will pay off if this spare capacity could be used to bring in spot volumes with much higher profitability. But the gas market will change, increasing the risk of underutilisation of Dahej capacity.

 

PLNG has been talking of building a new terminal at Kochi for the past 3 years and basic groundwork in terms of land, environmental approval, etc is nearly complete. Over the past two years, the source of gas was expected to be the Gorgon project in Australia. With the delay in the Gorgon project due to environmental problems and increase in capital costs, the timeline for the Kochi terminal has steadily been pushed back. While PLNG's initial stance was that Kochi would materialise only if a firm gas sourcing contract was in place, recent communication has been that it would go ahead even without a firm contract.

 

PLNG is now indicating that it would award the EPC contract for Kochi in the next two months. All the facilities at the site would be geared to operate at 5mt except the vaporiser, whose capacity would be 2.5mt. PLNG estimates capital costs for the 2.5mt project at Rs 26 billion, with project completion by 1QFY12. PLNG expects supplies of 2.5mt from Gorgon from early 2013, with Kochi operating on spot volumes for the first two years.

 

The Kochi terminal would be viable if it manages to secure 5mt LNG, though there is no visibility on that as of now. From PLNG's perspective, the strategy would be to repeat the success of Dahej - ensure viability of base volume of LNG, and make money mainly via spot volumes.

 

The big question is whether PLNG would really go ahead and award contracts for Kochi without firm gas sourcing. It has been talking of doing so for quite some time, but no action has followed to date. It would be extremely risky to go ahead with the project with no firm sourcing and without clarity on how much of domestic gas would flow from the KG-D6 block of Reliance Industries (RIL). Given that PLNG's own estimate is that Gorgon will not bring in supplies until 2013, we see no particular reason to take the risk of building the terminal two years in advance, unless PLNG believes that the LNG market is so tight that building a terminal is the only way to attract suppliers.

 

Additional LNG will be used to supply R-LNG from Dahej Terminal to stranded Ratnagiri Gas & Power. To increase Dahej Terminal capacity to 10 MMTPA between July 2008 and January 2009 as per schedule. The work on Greenfield Terminal at Kochi has already commenced and would be completed in first quarter of 2011. Demand for LNG expected to be firm driven strong demand from the sponge iron, fertilizer & power sector demand-supply gap. Spot cargo volumes expected to double in FY08;likely to drive topline. In the process of finalizing tie-up with Australia's Gorgon Projects for supply of LNG to the Kochi Terminal.