Management Discussion and AnalysisGlobal LNG Scenario:
With greenhouse emissions and global warming taking centrestage at global fora, withenvironmentalist crying hoarse over the depleting natural resources and economic punditspredicting a bleak fuel future, is it any surprise that over the past few decades, theinherent advantages of natural gas versus other liquid fuels commonly used in industry isbeing eulogized by everyone. The lower carbon emissions and the efficiency of natural gasas a fuel have made it the fuel of choice in the developed world. The developing nationslike China and India are aggressively adopting natural gas to fuel their industry and tomake their economic growth more environmentally sustainable.
During the last decade, the image of LNG market as an exclusive club for industrializedcountries has been shed. With Petronet LNG setting up a Regasification facility at Dahej,Gujarat, India became the first developing country to enter this new energy market. Butother countries like Thailand, Argentina, Brazil, Turkey etc. have started or are in theplanning and development stages to import LNG. However, Japan and South Korea are thedominant consumers and would remain market leaders even in the future. Though gas demandin these two countries is expected to grow marginally or even decline in the long term,India and China are expected to emerge as major players in the Asian regional LNG market.Both the nations are expanding their gas pipeline network and adding more Regasificationterminals. In the long run, the entry of new players globally will expand the market anddevelop new trade flows.
Currently, most of the major world economies are still recovering from the financialmeltdown that began towards the end of 2008 and continued through 2009. In 2010, the worldeconomies started limping back to normalcy and the trend is expected to continue in 2011.The global economic recovery would concomitantly lead to price and volume recovery in theLNG trade.
In the past few years, with the sudden rise of shale gas in the United States, the LNGindustry witnessed a paradigm shift. Due to its declining conventional gas production andpipeline imports, for long, the United States was touted to become a significant importerof LNG. However, that was not to be. Shale gas has dramatically altered the US gas marketlandscape. It not only turned the US domestic market into a surplus, but it is expectedthat by 2015, the United States may export LNG. With the US retooling its regasifiactionterminals for liquefying natural gas, the LNG market equations have changed significantly.This will have a major impact on countries like Qatar which were gearing up their LNGsupply chain with super-sized LNG trains of 7.8 MMTPA capacity and Q MAX and Q FLEX megaLNG vessels to supply to the United States. Qataris will have to divert the LNG supply andshipping capacity to other countries and new emerging consumers in the LNG market.
Before the March 2011 earthquake in Japan, there was an oversupply in the market.However, with the recent earthquake, most of the suppliers have put on hold their decisionto sell surplus volumes and both Buyers and Sellers are evaluating the impact ofearthquake on LNG demand with caution. Over the past few years, several key trends haveemerged not only in the structure of the deals, but also the players executing them. Thosetrends included: a rebound of the flow of spot LNG from the Atlantic to Asia; strongerspot demand in new markets like South America and the Middle East; and the Qatari strategyof securing new markets for LNG supply that originally targeted the US market. Finally,this increased need for flexibility attracted traders to become more involved in thebusiness in 2010.
LNG trade grew by approximately 20% in 2010 to 219 million tonnes as a raft of newsupply came on stream and demand bounced back strongly from the global economic crisis.Qatar accounted for half the 2010 growth in supply with the completion of its mega-trainexpansion. Russia, Indonesia, Yemen and Peru also added significant volumes as new trainseither came online or were ramped up to full capacity. Nigerian production staged a strongrecovery following the outages of 2009. However, North Africa saw production fall withfeed gas diverted to the domestic market in Egypt and for re-injection to support oilproduction in Algeria.
Asia led the demand recovery with South Korea alone importing over a quarter more LNGthan 2009, and there was also impressive growth in China, Japan and Taiwan. The UnitedKingdom and Italy provided most of the impetus to European demand growth as volumes fromthe new Qatari trains flowed to these markets. 2010 also saw the counter-seasonal marketsof South America and the Middle East have a significant impact during the summer months.The United States provided the exception to the otherwise rosy demand picture as anexpected surge in imports failed to materialize.
In terms of consumption level, countries in the Asia-Pacific region are driving theoverall LNG industry. The burgeoning demand for LNG in countries like Japan (post massiveearthquake, damaging nuclear power facilities and dwindling capacity), South Korea, China,and India would prompt construction of more LNG receiving terminals during the nextdecade.
LNG Market in India:
India’s economic growth report card has been steady at 8-9%, and it is likely tomaintain the same growth rate in the coming years. As one of the fastest growing economiesof the world, India is facing challenges to ensure reliable, clean and affordable energyto fuel its transformation.
In India, gas demand started from a very low base. Consequently, despite the rapidgrowth in Indian gas demand over the past decade, gas accounts for merely 10% of totalprimary energy consumption. Domestic production has nearly doubled following thecommissioning of Reliance's giant Dhirubhai field in April 2009 and with no internationalpipelines likely, and domestic production unlikely to keep pace with domestic gas demand,a significant requirement for LNG imports is emerging. India's energy security, at thebroadest level, is primarily about ensuring the continuous availability of commercialenergy at competitive price to support economic growth and to meet energy needs with safe,clean and convenient form of energy. The critical element of the country's energy securityare augmenting the domestic energy resource base, increasing energy efficiency, demandside management along with adequate import of energy in all forms including crude oil,natural gas and coal.
India’s current gas Demand-Supply scenario shows that there is a wide gap betweendemand and supply and the chasm is set to widen in the next five years. The 2010-11figures reveal that the gas demand is around 179 MMSCMD and the indigenous supply standsat less than 140 MMSCMD. The gap is set to increase at a very fast pace. As per variousanalyses, the gap would vary between 70 and 100 MMSCMD in 2011-12 and by 2014-15 the gapwould touch the whopping 150 MMSCMD mark!
Indigenous gas production has increased sharply since the commissioning of Reliance'sD6 gas field in the Krishna Godavari Basin and production in 2011 is set to be more thandouble that of 2008 levels. But it is significantly lower than what was earlier projected.Production is set to continue to rise as D6 reaches peak production over the next fewyears. In the longer term, ongoing licensing rounds and exploration activity in basins ineastern offshore (KG, Cauvery and Mahanadi) substantiate forecast of increasing gasproduction up to year 2022 before production begins to decline.
India currently has over 9,000 kilometers of gas transmission pipelines, but given thegeographical size of the country, its gas network is in a relatively underdeveloped state.Most of the transmission and distribution infrastructure is located in the northwest ofthe country. The Hazira-Bijaipur-Jagdishpur (HBJ) pipeline is currently India's largestand most important transmission system. The 2,800-km pipeline serves the northern Indianmarket and runs through the states of Gujarat, Madhya Pradesh, Rajasthan, Uttar Pradesh,Haryana and Delhi. It has been upgraded on a number of occasions and currently has acapacity of 1,200 mmcfd. The pipeline is currently running at full capacity and GAIL(India) Limited plans to upgrade the pipeline to around 3,500 MMCFD by June 2011.
AIL and several other companies have set out on an Gambitious program of infrastructuredevelopment to complete a national transmission network by 2015. The proposal would linkgas supply regions off India's east coast to the major centers of demand in the south andeast, as well as linking the rest of eastern India to the network.
With the growth in indigenous supply, India's relatively underdeveloped gas market isexpected to expand at a greater pace and significant additional imported gas supplies willbe required to meet the demand. It is most likely that this incremental demand will be metlargely by LNG imports. India received its first imports in 2004 and these are set toincrease considerably over the forecast period - by 2025, India is expected to bedependent on imports for around 44% of its supply and would require nearly 5,100 MMCFD ofimported gas.
In other words, the need for LNG in India's growing economy is too obvious. Even thougha part of the shortfall will be made good by other domestic finds which are expected tocome on-stream in the next few years, a large share of this incremental demand will befuelled by LNG.
Opportunities:
Being the first company to import LNG, the Company is instrumental in shaping thegrowth of the Indian Natural Gas sector. The Company has set up high industry efficiencybenchmarks in LNG operations and market development. The Company's main thrust is oncatalyzing the growth of Indian Gas sector through enhancing the gas supply to meet theneeds of existing consumers as well as to develop new consumers.
Petronet LNG Limited (PLL) is emerging as the key player in India's supply-constrainednatural gas market. PLL is the operator and owner of India's first and largest LNGterminal at Dahej. It is now exploring multiple options to further leverage the potentialof imported LNG in the Indian market.
The gas market in India is rapidly evolving with strong economic growth fueling energydemand across sectors. Significant gas finds off the east coast of India, de-regulationand entry of several private & foreign players are some of the factors shaping thesectoral landscape. Further, the supply deficit situation is resulting in higher pricebenchmarks for supply of gas to domestic market. The Company, in addition to long-termimport, has started sourcing LNG on Spot/ Short-term basis from different suppliers’worldwide.
To meet the demand-supply gap of natural gas in the country, the Company has doubledthe capacity of its first LNG re-gasification plant at Dahej from 5 MMTPA to 10 MMTPAwhich may be further expanded with commissioning of the second LNG berth at Dahej. TheCompany is also constructing another 5 MMTPA Greenfield LNG import and re-gasificationplant in Kochi in the state of Kerala. This will enable the Company to expand its reachand supply of natural gas in the South Indian market. In addition, the Company isexamining the feasibility of constructing another LNG Terminal in the East Coast of India.
Threats from Competition:
All the major players in the Indian hydrocarbon business have plans of entering thenatural gas business. New gas discoveries in K G Basin & Mahanadi Basin would increaseavailability of gas in the country which may put pressure on the price of gas. Theexpected competition in the future scenario will not only be from Indian players, but alsofrom several multinational companies that will extend their presence in the growing Indianmarket. As a result, the competition is expected across the entire gas value chain. YourCompany is fully prepared to face the competition from Indian as well as overseas playersin the market.
In India, gas competes primarily with coal (in Power sector) and with liquid fuels (inIndustrial & Fertilizer sector). As a result, gas demand is fairly price-sensitive forPower sector with low elasticity for the fertilizer sector due to the existing fertilizerpolicy. The City Gas segment where the competition is mainly with high-priced petroleumfuels (HSD, Petrol, LPG etc.) faces challenges in terms of infrastructure and conversioncosts.
In the high economic growth scenario, to sustain 7-8% economic growth over the next 20years, gas-based power is expected to remain a focus area and high levels of capacityaddition and PLFs are expected in spite of relatively high gas prices.
Segment-wise or product-wise performance:
Presently, the company primarily deals only in one segment. i.e. Import andRe-gasification of Liquefied Natural Gas (LNG). During the year, 440.35 Thermal BritishUnits of re-gasified LNG was delivered to the off-takers and customers.
Risk and Concerns:
The Company considers good Corporate Governance as a prerequisite for meeting the needsand aspirations of its shareholders and other stake/shareholders in the Company. As partof the Company's efforts to strengthen Corporate Governance, the Board of Directors haveformulated a Risk Management Policy, which puts in place a risk management structure withclear definition of roles and responsibilities, as well as a risk portfolio involving acontinuous process of risk identification, risk assessment, control assessment and riskmonitoring, review and communication. The Company aims to:
• Identify, assess and manage existing as well as new risks in a planned andcoordinated manner
• Increase the effectiveness of PLL's internal and external reporting structure.
• Develop and foster a culture within the organization that encourage all staff toidentify risk and associated opportunities and respond to them with appropriate actions.
Risk of Competition:
LNG competes with naphtha, LPG, coal, fuel oil and similar fossil fuels. which arecurrently widely used by industries like fertilizers and power. In addition to theabove-mentioned fuels, LNG also competes with the suppliers of domestic natural gas. LNGoffers several advantages over the above-mentioned fuels. LNG sourced by your Companyunder long-term contract is currently priced competitively against these alternate fuels.However, a reduction in prices of the alternate fuels and increase in long-term prices ofLNG could lead to increased pricing pressure on LNG suppliers and may have an adverseimpact on future growth of the Company.
Currently, the company does not produce or market any other products other than R-LNG.The sole activity is import and re-gasification of LNG. Your company has sourced LNG underlong-term contract from RasGas of Qatar and sells re-gasified LNG mainly to threeintermediate off-takers, namely GAIL (India) Ltd., Bharat Petroleum Corporation Ltd., andIndian Oil Corporation Ltd. with whom your Company has long-term gas sale and purchaseagreement. Even though this assures market for the entire production, there are certainrisks involved in limited customers. In addition to the existing contract with RasGas,your company has also executed another long-term contract with the Australian entity ofExxon Mobil for supply of around 1.50 MMTPA of LNG from its Gorgon project to meet therequirement of new LNG Terminal coming up at Kochi. Your Company has also tied up forimport of around 1.50 MMTPA of LNG on short-term basis from various suppliers and sold tovarious refiners & industrial consumers.
Internal Control Systems and their Adequacy:
The Company has developed adequate internal control system commensurate to its size andbusiness. The Company has appointed M/s KPMG, an outside agency as its Internal Auditors,who conduct internal audit for various activities. The reports of Internal Auditors aresubmitted to the Management and Audit Committee, which further review the adequacy ofinternal control system.
Financial Performance with Respect to Operational Performance:
The turnover during the financial year ended 31st March, 2011, was Rs. 13,265.24 Croresincluding other income as against Rs. 10,746.92 Crores in 2009-10. The net profit duringthe financial year ended 31st March, 2011, was Rs. 619.62 as against Rs. 404.50 Crores in2009-10.
Human Resources:
During the year, the Company maintained harmonious and cordial industrial relations. Noman-days were lost due to strike, lock out etc. As on 31st March, 2011, there were 280employees including three whole-time Directors.
Disclosure by Senior Management Personnel:
None of the Senior Management personnel has Financial and Commercial transactions withthe Company, where they have personal interest that would have a potential conflict withthe interest of the Company at large.