Evaluating Russia's offer for Yamal LNG phase two: Petronet LNG

Russia has offered Indian oil companies including Petronet LNG, Indian Oil Corporation and BPCL a stake in second phase of Yamal LNG. Petronet LNG is evaluating the valuations to come to a final decision, says Prabhat Singh, MD & CEO of the company. Speaking about the company’s business, Singh says that the Dahej plant is working at more than 20 million capacity and there is room for further expansion. LNG consumption, which is 40-45 million cubic meter per day, is expected to rise by 10 million cubic meter a day in current fiscal. Tariff at Dahej plant is lower than other plants, but is expected to rise every year, he says. Below is the transcript of Prabhat Singh’s interview with Nigel D’souza and Reema Tendulkar on CNBC-TV18.Nigel: Before we talk about your business, there are some news reports today that indicate that Russia is offering various Indian firms a stake in the Yamal LNG project. Any such stocks? It has been mentioned also, is reported that Petronet LNG as well is part of these discussions. Could you tell us whether that is true? What exactly is the benefit that can come out of there?A: While the minister had visited Saint Petersburg recently, this dialogue had come up there and they are, the Yamal Project is actually going into the phase-II. So, they are trying to offer equity into their LNG plant there. And obviously, it is for us to examine and see whatever is there, because going forward, since when you really look at the market, what is happening is that a lot of gas is available now in market. So, it has to be a trade off to see whether they are taking the equity into the LNG project and vis-à-vis the availability of LNG in the market. How it is actually trading off and therefore I will be evaluated. They have offered, no doubt about that. They had requested that if we are interested, we could see the proposal, so we will have a look at that and then take a call. But the news is that yes, they had offered us.Reema: So, what you are saying is that it could make strategic sense which you will decide based on valuations?A: Definitely and it is not only to Petronet LNG. The offer has also been because there were other companies there, so ONGC Videsh (OVL) and Indian Oil Corporation (IOC) was there, Bharat Petroleum Corporation (BPCL) was there. So, I am saying that there are companies. It is a kind of from the Indian side, they have offered it to the Indian team. So, all of us will evaluate and come back with our own views and then see how it works out.Nigel: I am just reading a report where they have said that gas consumption for the month of May was higher by only around 2.5-3 percent. What kind of capacity utilisations have you been operating at? What kind of demand are you seeing? Do you expect demand to come in higher as we go through this FY17?A: Yes, I think at this moment of time, we are very happy to say that we are operating at nearly more than 20 percent capacity at Dahej. And there is still demand for more because these power plants have come online and there was a swap option with the eastern located power plant which was not being able to fructify because of some issues. That is now coming online. So, there is a need of more and more gas and therefore, nearly around 8-10 million cubic metres of gas which is going to be utilised by the power plant, is going to continue for some time and even the fertiliser plant poolings have happened. So, there also, a good chunk of gas is going there in LNG. Nigel: Could you help us with what exactly is the expected LNG offtake for FY17? As you said, there is various consumption, etc. that is growing, so could you give us some kind of number over there? As you mentioned, we are seeing higher consumption from the fertiliser sector.A: Actually, if you really see, today, the LNG consumption is nearly around 55-58 million cubic metres a day. But this is reasonably high. So, on an average, 40-45 million cubic metres a day is something which definitely is going to be there. And going forward, you can say that, because it has been 40-45 and now it is running around 55-58. So one can assume that around 50 plus-minus the consumption would continue and therefore, in this particular year, other than what the previous years have happened, the consumption of LNG would be reasonably higher, nearly around 10 million cubic metres a day, because around 40-45 is what has happened earlier and this year, it will be definitely around 10 million or so higher than the previous year.Reema: Certain reports suggest that your Dahej regas terminal expansion plans may be completed ahead of the company’s guidance. You had earlier told us that it will be completed by November, 2016, but reports suggest that it could now be completed by September, 2016. Is there any truth to that and how will it then change the estimates for the company?A: No, in fact, the plant we had envisaged to complete by November, but since there is a need of the country to have more and more gas earlier, although the tankages, etc. may take time and they become available by end of October-November only, but we would be in a position to start the re-gasification part earlier which is the important point. And therefore, more gas can start flowing from September 1 onwards. And we will be able to satisfy the additional demand required. So, to that extent, in a way the revenues will start coming up earlier than expected. And we are looking forward to good utilisation of the expanded capacity as well.Nigel: Let us get your take on what the expected blended tariffs going ahead for FY17. Could you tell us that? As of now, the street is really assuming very low utilisation levels at Kochi. What kind of levels are you targeting?A: Tariffs normally although at Dahej, if you really look at whether it is Hazira or whether it is Dabhol or whether it is Kochi, the tariffs at Dahej have been reasonably lower, but these tariffs on an every year basis have an incremental component, so they increase by around 5 percent. So, that way the tariffs will keep on increasing. And when you talk about Kochi, the terminal earlier was actually being operated at 3-4 percent. Now, it has come to nearly 6-7 percent. And going forward, because the Kochi refinery is coming up and The Fertilizers and Chemicals Travancore (FACT) has started drawing. So, we anticipate that it will go even slightly higher, but the important point here is that the pipeline connectivity from Kochi to Mangalore and Kochi to Bengaluru, that has taken a positive stance now. With the new government coming up in Kerala, they are very positive and GAIL also has gone ahead and floated the bids for two spreads there. We anticipate that by August middle or so, they will be awarded. So, pipeline activity, once it starts, it will give a flip to the capacity utilisation of Kochi, but pipeline itself will take around 1.5-2 years to at least start. But between that, we are planning the way we are utilising, some small scale LNG work we will start and Kochi, the utilisation we are doing with storages, we are using it as giving out on rent. Then bunkering, etc. is what we are doing from there and also the cooling off of the new vessels is what we are doing. So, a lot of new business we are doing from there. And we anticipate once this pipeline comes up, then the pipeline utilisation would jack up at least with the Mangalore sector coming in nearly around 40 percent and then the balance, once the Bengaluru comes up.