Long-term deals will be in sync with crude: GAIL

In an interview to CNBC-TV18, BC Tripathi, CMD of GAIL spoke about the latest happenings in his company and sector.

"The long-term deals will be in sync with the oil, the way oil prices goes but you won’t see the immediate impact because it has last three months or last 12 months average price of crude oil", he said.Below is the verbatim transcript of BC Tripathi’s interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: Can you tell us because of higher liquefied natural gas (LNG) prices what kind of a boost would it be for some of your own LNG import deals?A: The point here is that as oil is moving up, the long-term contract prices are also moving. However, the spot prices are basically a reflection of a short-term supply demand in the winter season today. China, Japan, Korea are sourcing a lot of volumes from the international market at this moment of time. So, that is the reason the spot prices are going up.However, the long-term deals will be in sync with the oil, the way oil prices goes but you won’t see the immediate impact because it has last three months or last 12 months average price of crude oil. Therefore these spikes which are there are largely because of the spot prices and because of the winter demand in China and Japan.Latha: What is your in-house call on both crude as well as the longer-term LNG contract prices?A: Today almost 70 percent of LNG supply is at a long-term contract and they will go in tandem the way oil moves.Latha: If you were to sign a contract today for the next five years or I don’t know how long you normally sign your long-term contracts, where would they be? Would they be at USD 6, USD 5, how much?A: There is a complete shift in the LNG market. Generally, these long-term contracts are for 20 years. However, off late we see now people are also talking of short-term or mid-term deals, which are three years, five years or 10 years. So, hardly any long-term deals are taking place today internationally because people are playing short.In that, it should be somewhere around about USD 7-8 because when you see the projections are that by the end of the next year or mid next year, the crude should value somewhere on USD 60. If crude remains USD 60 per barrel, then that should be the price of the long-term volume.Latha: That USD 6-7 we were hearing of contracts, not possible now?A: Long-term contracts, I doubt; they will not be possible. Of course, on the spot you may get but today the spot is plus USD 9, it is reaching USD 10 but USD 6-7 for long-term, I don’t think is the current market.Sonia: Can you also tell us a little bit about the downstream business, what kind of improvement do you see in liquefied petroleum gas (LPG) prices in the second half of the year and what kind of an improvement would you see in your own operational performance?A: First of all, the transmission value, we have CNG pipeline capacity utilisation has grown by 2-3 percent. It is reaching towards 50 percent utilisation now. So, that is going to be a plus side.Also, the petrochemical prices are likely to move up, so, that segment should also give us comparatively better returns going forward. As far as the offtake of LNG or long-term contracts are concerned, the offtake is smooth and we see that this will remain stable business.In the retail sector, in the transport sector, commercial industrial sector, through a joint venture, we see the growth happening which is growing somewhere in the range of 10-12 percent growth in this segment overall in the retail sector.Sonia: Within the petchem segment, just a follow up on that, what kind of EBIT earnings would you expect in FY17 and FY18, some analysts are forecasting that because of the improvement, you could see almost Rs 800 crore of EBIT in FY18. Is that a reasonable assumption?A: It won’t be fair on my part to give you a number to be specific on that but as of now the way the trend is, it is on upward trajectory.Latha: Your Dominion Energy and Cheniere contracts, how long do they run?A: They are starting somewhere March 2018. These are 20 years contracts.Latha: What would your average contract price be now, counting the Dominion, Cheniere contract as well?A: Today it is somewhere close to what we have the Qatar contracts because at a crude price of USD 65 per barrel, the price for oil and the Henry Hub indexation are by and large at some level.Latha: So that is USD 8. How much is it?A: Let us say if it is USD 55-60 per barrel, it would be in the range of around about 7.5-8.5.Latha: Do you think that in the next two years you will be able to bring down this average?A: As I said, this is a factor of oil prices and Henry Hub prices. Their future projection for Henry Hub prices is that they will remain stable in the range of USD 3 or so. Whereas the oil, there are different projections coming but even if you take about USD 60 per barrel, I believe both the prices will balance out at the same level of USD 7.5-8.Sonia: Any possible potential liabilities that still exists from the US LNG off take?A: These are long-term contracts and we have to off take those volumes and part of the volumes that we are right now working on -- we have sold part of the volumes, further deals are being discussed and negotiated.Latha: How short are you to fulfil the entire contract?A: A lot of these volumes will come to India. We have a demand here in India for our new fertilizer plants, new petrochemical plant, which we have to centrally commission. So, about 60-55 percent of volumes will come to Indian markets. So, we won’t say that we are short, because that is the demand. Today we are importing almost 4 million tonne extra LNG beyond our long-term contracts. So, this will fill that gap.Sonia: I didn’t get that number, what is the total amount of LNG contracts that you have signed up currently with the overseas companies?A: We are consuming almost 9-10 million tonne of LNG. Out of that, we have hardly 5-5.5 million tonne as long-term contract. Next 3.5 million tonne is a short-term contract on the spot market, so, that gap will be filled up through the US volume largely and still as the demand grows for the new fertiliser plant, there are five fertiliser plants under construction. Then you have the petrochemical plants then you have the City Gas -- the way we are expanding, every year almost 4-5 lakh houses are being connected.Sonia: You don’t see any kind of pre-tax losses in the following year if in case you are unable to generate the required volumes?A: The US contract is an free on board (FoB) contract. It has an option either we bring to India or we sell into international market. So, it is not that it is a destination fix contract, it is a flexible contract, it can go anywhere in the globe wherever we get better margins.