by R. Sasankan
Petronet
LNG’s liquefied natural gas terminal at Kochi – a virtually rusting
plant that has been able to utilise just 5 to 10 per cent of its
capacity since its inception a decade ago -- is a stark reminder of the
risks that intrepid investors face in India’s gas-based industry. When
the Narendra Modi government made its ringing commitment to crank up the
share of natural gas in India’s energy mix from a lowball 6.1 per cent
to 15 per cent by 2030, it sparked renewed interest in establishing LNG
regasification terminals across the country’s coastal districts.
Sadly, that fervour has dissipated quickly once investors realised that
it wasn’t going to be a hunky dory ride into India’s gas-based business.
Cost is the really big issue: the gas has to be imported in the form of
liquefied natural gas and then re-gasified before it can be supplied to
consumers, which is a very costly proposition when compared with the
cost of transporting gas through pipelines, an option that is fraught
with its own risks.
The existing LNG regasification capacity remains badly under-utilized.
Except for the Dahej terminal of Petronet LNG which had tied up
customers before it was commissioned, all the other terminals are
operating at sub-par levels. The plight of the Kochi terminal
underscores the huge risks that any investor looking to break into this
sector must be ready to face. Any private company in PLL’s place would
have gone bankrupt long ago. Public sector companies can afford such
extravagant luxuries but not private enterprises which are answerable to
their nit-picking shareholders.
Petronet LNG Ltd (PLL) is promoted by the four public sector oil and gas
companies with their combined investment capped at 50 per cent. They
have rarely grilled the management of PLL, largely because investment
decisions are taken by the bureaucrats to whom their chief executives
report.
There
is some speculation about why Indian Oil Corporation (IOC) – one of the
promoters of PLL – chose to commit an obvious blunder when it decided
to set up an LNG terminal at Ennore in the south Indian state of Tamil
Nadu. True, IOC did not go through the tortuous process of signing on
consumers before setting up the terminal as PLL did in Dahej. But seen a
little differently, it would now appear that IOC had made a master
stroke with its Ennore foray as it appears to have scared off other
private investors who were hatching plans for LNG plants in the
country’s East coast. A consortium comprising Shell, Gaz de France and
GAIL had proposed to set up a floating regasification terminal on the
Andhra Coast. But when IOC flexed its muscles and went ahead with the
construction of the Ennore terminal, Shell and Gaz de France quickly
chickened out and dropped out of the consortium, realising that the
demand for gas in the East coast wasn’t going to be enough to sustain
two such terminals.
The capacity of IOC’s Ennore terminal is 5 million tonne per annum which
is being created in phases. Being the most industrially advanced state
in the East coast, Tamil Nadu with refinery, fertilizer units and petro
chemical plants close to Ennore can provide the basic market for such a
terminal. The Ennore plant is expected to be commissioned in the next
three months but it may still struggle to tie up an adequate number of
consumers to be able to operate at full capacity.
Meanwhile, the Adani group had proposed a 5 million tonne regasification
terminal at Dhamra on the east coast in Odisha, the home state of
petroleum minister Dharmendra Pradhan. IOC and GAIL together made an
informal offer to pick up 49 per cent stake in the Dhamra terminal. IOC
booked 3 million tonne capacity at Dhamra but there is still no word
about picking up an equity stake.
There
is one complication that could wreck plans for both Dhamra and the
Ennore plants. Andhra Chief Minister Chandrababu Naidu is determined to
have a floating regasification terminal on the Andhra Coast. Naidu has
the knack to get the right people to invest. Naidu enjoys a good
equation with Mukesh Ambani of RIL whose East-West gas pipeline has been
rusting after the collapse of gas production at KG D6. If IOC finally
agrees to pick up equity in Dhamra, it will insist on a controlling
stake, which could see the exit of the Adani group.
If the East coast looks like a virtually no-go for LNG regasification
plants because of low demand from consumers, the West coast is not much
better. The regasification terminal at Mundra in the state of Gujarat
floated by GSPL LNG Ltd, a joint venture between Gujarat State Petroleum
Corporation (GSPC) and Adani, is already looking for a strategic
partner. IOC got an in-principle approval from its board to pick up to
50 per cent stake in the Mundra terminal, expected to be commissioned by
end of 2018.
Enquiries reveal that both the Dhamra and Mundra proposals have hit a
logjam and this development is not surprising for anyone who has some
idea of IOC’s style of functioning. IOC normally invests in joint
venture projects only if it can exercise control. A PSU giant cannot be
expected to act otherwise. It has the resources to buy out other
partners and will not hesitate to do so if the situation warrants it.
But there is absolutely no question of IOC playing second fiddle in a
joint venture. GSPC is going through a difficult phase financially and
may not be averse to an attractive deal but it must get the Adanis to
accept IOC’s onerous conditions. Valuation remains a troublesome issue. A
settlement on Mundra is expected to see IOC as the operator of the
terminal with a controlling stake.
Even if the Adanis agree to be a junior partner in the Mudra project, it
will not be a smooth arrangement. IOC is the big daddy in the refining
space and its aggressive style will make it difficult for junior
partners to co-exist. The Adanis carry a lot of clout now and they are
equally aggressive in framing its business strategy. But it will find
the going extremely tough if IOC heads the joint venture. IOC has a lot
of heft because of its strong pan-India marketing network. IOC is feared
more than it is respected and it seems to enjoy this status.
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