GAIL plans $2.7 bn spending to counter Reliance

GAIL plans $2.7 bn spending to counter Reliance
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First Published: Thu, Feb 22 2007. 02 17 PM IST
Updated: Thu, Feb 22 2007. 02 17 PM IST
NEW DELHI: GAIL (India) Ltd., the country’s biggest natural gas distributor, will spend $2.7 billion (Rs11,946 crore) expanding its pipeline network by two-thirds to counter competition expected from Reliance Industries Ltd.
State-owned GAIL plans to add 4,000 kilometers to its 6,000-kilometer pipeline network by 2012, Chairman U.D. Choubey said in an interview yesterday. About 70% of the cost will be funded by debt, he said.
Reliance’s 2002 discovery of gas reserves that will double India’s output is challenging GAIL’s dominance of a market restricted to state-owned companies until 1999. The distributor’s market share may wane as Reliance plans to build pipelines to bring the fuel to customers by 2009.
“A lot of companies are developing gas fields,” said R.K. Gupta, who manages $70 million in equities at Credit Capital Asset Management in New Delhi. “GAIL offers an advantage because it has an existing network and connections already established with the consumers. This is the best option left for the company.”
Reliance’s billionaire Chairman Mukesh Ambani on 12 January announced plans to spend $15 billion on building plants to turn coal and lignite into gas and lay pipelines to supply the fuel to homes in the western state of Gujarat.
Krishna Godavari
Reliance’s 2002 gas discovery at the Krishna Godavari basin off India’s east coast may total as much as 35 trillion cubic feet, drilling partner Canada’s Niko Resources Ltd. said 1 November. That day, Reliance said it plans to invest $5.2 billion to produce 80 million cubic meters a day starting in 2009. That will double India’s current gas output.
GAIL will approach Reliance Industries, Cairn Energy Plc and Gujarat State Petroleum Corp., which also have gas fields in the Krishna Godavari basin, or KG Basin, for distribution contracts, Choubey said.
“All eyes are set on the KG basin. Our aim will be to try and tie up gas produced from sources belonging to Reliance, Cairn or Gujarat State,” Choubey said. “We would like to transmit their gas.”
Chevron Corp., the second-largest U.S. oil company, which has a 5% stake in a unit of Reliance, may join the Indian company in setting up a gas distribution network across the country, the Business Standard newspaper reported on 4 May, citing a letter written to India’s oil ministry.
The New Delhi-based distributor plans to build pipelines to connect new fields to consumption centers, Choubey said. It will also connect to liquefied natural gas terminals being built and expanded in western and southern India.
‘Biggest Concern’
“We are moving from a simple and a homogenous business environment, wherein there was one producer and one distributor, to one that is complex and heterogeneous,” said Choubey, who was appointed as the chairman on 1 February. “My biggest concern is to continue to be a dominant player in the new scenario.”
GAIL’s shares rose 1.9% to Rs282.75 in the past year, trailing a 40% increase in the Bombay Stock Exchange’s benchmark Sensex index, partly because the company’s profit is reduced by government orders to state energy companies to cap fuel prices and contain inflation.
Reliance Industries’ shares have doubled in the past 12 months to Rs1,406.15.
Additional gas will help GAIL utilize its existing pipelines to full capacity, Choubey said. The company’s pipelines, which have a capacity to supply as much as 140 million cubic meters of gas a day is utilized about 55% for want of the fuel.
‘Weak Point’
“Our weak point is that we don’t own the gas,” Choubey said. “We have to depend on domestic or imported gas.”
GAIL’s second response to competition in gas distribution is to expand the chemicals business by about 360,000 metric tons a year. Chemicals now earn 30% of revenue.
The gas distributor plans to build a Rs57 billion chemical plant that will produce intermediates to make plastics in the country’s north-east. The plant, expected to be ready in five years, will produce 220,000 tons of polymers. GAIL will own 70% stake in the Brahmaputra Cracker and Polymer Ltd.
The capacity of a polymers plant in northern India is being expanded by 47% to 440,000 tons a year and construction of a third plant is being considered in southern India, Choubey said.
India’s current gas supplies of 85 million cubic meters a day, including imported liquefied natural gas, falls short of potential demand of 170 million cubic meters, according to estimates given by the oil ministry in July. Gas consumption may rise to 400 million cubic meters a day by 2025 if the economy grows at the projected rate of 8% a year.
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First Published: Thu, Feb 22 2007. 02 17 PM IST
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