Crude price fall hit customers' buying capacity: Petronet

According to Garg, improvement in margins will depend on offtakes. He hopes to see some (improvement) in the next two months.

Below is the transcript of RK Garg’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: The numbers indicate that the lower crude prices and gas prices globally are beginning to hit. Can you take us through the numbers; this is a fairly big fall that we are seeing in EBITDA and sales? Are we going to see that now for the next couple of quarters?A: As far as the full year basis is concerned, the company has done reasonably well. We have operated our Dahej terminal above the nameplate capacity. However, Q4 was not that good. The primary reason is off take of long-term LNG was less as compared to the nominated quantities. As market knows and everybody knows that prices under the long-term contract is higher than the current prevailing spot prices. Latha: How much was the long-term contracts less by and can you give us a forecast for the current quarter as well?A: In the last quarter there had been a reduction of around 30 percent of the quantity that we have noticed. However, everything depends upon how the things develop in the market in near situation. We have been in discussion with our off-takers and trying to mitigate the sudden drop in the crude prices and that would help in again bringing back to the normal situation. It is very difficult to say at this stage what is going to be in the next two quarters at this moment.

Sonia: Your Dahej utilisation levels also fell to about 74 percent because of the falling volumes. Can you give us a sense of whether there is more pain to come both in terms of utilisation levels as well as volumes from the Dahej terminal? A: Dahej terminal is the major bread and butter for Petronet LNG and have been operating quite well. However, I did mention that because of the long-term volumes have been reduced there is a reduction. We have seen during the last few days, there has been some increase in the Brent prices and the crude oil levels. However, that is not going to affect much with respect to the pricing. We are in discussion with our off-takers as we mentioned that to see that how the consumers – those who have reduced the quantity they should bring back again they will off-take the long-term quantity. Latha: How much of long-term contracts are you locked into? What percentage of your sales are in long-term contracts of say two years and above? A: We are having around 75 percent of capacity under long-term contracts. As far as the contractual arrangement is concerned it is a back-to-back arrangement with the LNG supplier and our off-takers. Contractually there is no risk on Petronet as such. However, the situation, the sudden drop in crude prices has affected the consumers’ ability to immediately off take these quantities but the full year nominated quantity starts from January to December. We have just past three or four months and we have to see the situation by next June.

Sonia: If you can just give us an estimate of what the volume fall could be from hereon? I understand you did about 93.2 units from the Dahej terminal this quarter versus about 140 units in the previous quarter in Q3. So, in Q1 of FY16 what could the volumes be? A: That is why I say that all depends upon how the long-term volumes will be picked up. It is very difficult to say. It is the commitment which has been there for this quantity by all the off-takers and definitely we will try to increase this quantity more.Latha: You mean your buyers are not taking quantity which they had promised to take? A: Yes you are right because the long-term commitments are there however the sudden drop in crude prices, the formulation under the long-term contracts is such that it takes a little longer time to adjust to the market. We believe that we will try to solve this issue very quickly.

Latha: If they don’t take quantities which they have promised to take, do they pay a penalty? Do you have any security if they don’t take quantity that they promised to take? A: As contractual arrangement there is a take or pay liability. If they don’t take they have to pay for it but it will happen only at the end of the year, not on quarter-to-quarter basis.Sonia: Your board has also approved an expansion of the Dahej terminal. Can you just tell us how much will you expand to and what would the project cost be say over the next couple of years? A: We had been already working on expansion of Dahej from 10 million tonne to 15 million tonne which is going on schedule. Board has also considered a proposal for further expansion of 2.5 million tonne more. So, it will make the total capacity of Dahej terminal to 17.5 million tonne. We are now working on this expansion and we come back to the board when we will have done all the work. The board has given intrinsic clearance to go ahead with that.

Latha: Your average contract level now is USD 13? A: Yes, it is very close to that; long-term prices. Latha: At the end of FY16 what might it fall to? A: It depends upon the crude prices because the prices are linked with the crude levels. Latha: Let me put it this way, how many of those contracts will get over at the end of one year? Will there be some relief from high cost inventory? A: Every month the price is re-fixed depending upon the crude what was prevailing in the last year and average price is worked out. So, definitely we will come down because the crude levels have come down but it will not align exactly with the market. It will take a little longer time to be aligned with the market. Latha: Can you expect that in the current quarter your margins will be at least a little better than what was for the quarter gone by? A: Everything depends upon the off take. We expect the off take should improve. Let us see how the off take should go.