GAIL (India) Ltd’s plans for monetising two of its pipeline projects seem to have been scrapped, said Chairman and Managing Director (CMD) Sandeep Kumar Gupta. The company is working on securing more long-term gas supplies in its core business and simultaneously looking at expansion in newer businesses like electrolyser and solar manufacturing.
The company has initiated arbitration against a former unit of Russia's Gazprom in London after the latter reneged on its contractual obligation to supply liquefied natural gas (LNG) which forced GAIL to buy expensive gas at a time when prices were on a high. The former German arm of Gazprom, now called SEFE, has resumed LNG supply to GAIL since March but GAIL is paying for it as per contract pricing which is higher than the current spot market price. Gupta said there was nothing wrong with the contract, it was a breach by the supplier. Edited excerpts of the interview:
The government had identified two of GAIL’s operational pipeline projects for asset monetisation. What’s the status of that plan?
When Niti Aayog identified the assets to be monetised, it included two of our pipeline projects. Then we were asked to demonstrate why these assets were not beneficial to the company and should be monetised. But since then, there has been no traction on that front. So, we believe that plan is dead. Even OMCs (oil marketing companies) have plans but there is no progress on that front. That’s because all companies, at least in the oil and gas space, have been able to demonstrate that we have sufficient borrowing capacity, and we have good credentials by virtue of which we are able to raise funds at cheaper rates. We are able to raise funds at 7.5-8 percent despite the high interest rates. Any investor buying assets will look for returns and we have seen that they typically look for nothing less than 13-14 percent.
What are GAIL’s capex plans? How do you plan to finance it?
We did capex of Rs 9,100 crore in FY23. In FY24, we plan to spend Rs 10,000 crore. While FY23 was not a good year in terms of internal resource generation, we expect FY24 to be robust with sufficient resource generation to finance capex with some borrowing.
How much debt would you be raising? Is there a concern over the debt given how the interest rates have gone up? Do you expect interest rates to go up?
That will depend on our internal resource generation, but we will manage with total borrowing of Rs 5,000 crore-Rs 7,000 crore. This additional borrowing is not much and may not put pressure on us due to high interest rates. I think, inflation has been contained to a large extent. I do not see much room for further interest rate hikes given that there is need for growth.
What is the plan for expansion in petrochemicals?
JBF Petrochemicals is setting up a 1.25-million-tonnes-per-annum (mtpa) capacity unit; we plan to complete it in two years. We have 810 kta (kilo tonnes per annum) at Pata (Uttar Pradesh). We are also setting up a 500-kta PP (polypropylene) unit at Usar (Maharashtra) integrated with PDH (Propane Dehydrogenation). Also, we are setting up another PP unit of 60 kta at Pata. These are existing plans where work is already going on. Pata will be completed by April 2024, and Usar will be ready by April 2025. We are also considering whether to set up ethane crackers or not, given that petrochemical margins are currently weak. We will take a call on the basis of future projections, but it is at an early stage, still on the drawing board.
But according to media reports, GAIL is planning to set up a Rs 40,000 crore-ethane cracker on the West Coast. What is the plan?
It is still at the drawing board; we have internal discussions going on, but we can talk about it only if we have a board approval.
Earlier this year, the National Company Law Tribunal (NCLT) approved your resolution plan for JBF Petrochemicals, clearing the way for acquisition. Once you acquire it, what is the plan?
We have committed to invest Rs 2,100 crore in the resolution plan and we will have to spend another Rs 2,100 crore to refurbish it. So, the total capex would be Rs 4,200 crore, which is a part of our larger capex plan. The equity portion is accounted for in the Rs 10,000-crore total capex that we have announced.
GAIL issued an expression of interest (EOI) in February aimed at buying up to 26 percent in US-based LNG plants or projects to secure supplies. What’s the status?
As for the US gas and equity investment plan for which we have floated the EoI (expression of interest), I have said that at least half a dozen parties have expressed interest and we are in the process of shortlisting, after which we will make a suitable decision.
GAIL is eyeing opportunities in solar photovoltaic (PV) manufacturing. What is the overall plan?
We are scouting for opportunities for solar panels, etc, and this is a space where we want to be present. We are looking at different pathways to achieve ‘net zero’ emission levels. Our renewable ambition is aimed at two things – to help achieve the ‘net zero’ goals, and to capture the margins.
GAIL is setting up an electrolyzer unit. Would you look at expanding more in green hydrogen? The government has approved Rs 19,744 crore support for the National Green Hydrogen Mission but the details of how the financial support would be extended are not yet to be finalised. Would that have a bearing on your plans?
We are setting up 4.3 tonnes per day of electrolyzer capacity which will be commissioned within this calendar year. We started this project long back and it was not based on the green hydrogen mission and the government support; it is independent of that. This is too small a plan to need VGF (viability gap funding). Based on this experience, we will scale up. If there is more scope in green hydrogen, we are open to enter any segment if it is allied to our business.
Last year, GAIL started its first project for gas blending. Will you expand the capacity?
We have started experimenting with blending hydrogen with natural gas. We have permission for 5 percent blending. We are studying the effects of blending on metallurgy. Based on the outcome of this and the electrolyzer capacity, we will take further steps in green hydrogen.
SEFE, formerly a unit of the German arm of Gazprom, declared force majeure last year citing the war in Ukraine and suspended supplies to GAIL. This has dented the company’s bottom line in FY23. Are you taking any legal recourse?
They had alleged force majeure. We did not accept that considering that this was a portfolio contract, and it should have supplied from other territories if there was an issue in supplying Russian gas. So, on one side, the supplies have resumed, and we are now receiving the full quantity as per contract for the past two months. We expect those volumes to continue in future also. But yes, we have taken this up legally against them to press for this specific performance and to claim damages. Our request for arbitration has been filed in London.
What are the damages you are seeking?
We are pressing for specific performance and the additional cost which we had to incur for the period of non-supply. I can’t quantify it as of now. Those amounts will be submitted to the arbitration tribunal later when it is constituted. We believe that this was a portfolio contract, and they should have gone as per the spirit of the contract. They should have sourced the cargoes from other geographies and supplied us.
What are you paying for the cargoes that you are receiving right now? Is it higher than the current spot price?
It is based on the contractual formula. Yes, definitely (it is higher than the current spot price). It is based on the nine-month average.
You are looking at long-term supplies of gas. Given the experience of how Gazprom reneged on their contract, what are you doing differently to protect your interest?
There was no defect in that contract; it was a portfolio contract. It was a breach of contract, which can happen in any contract, and there is legal recourse available. It is not that there were some weaknesses in that contract that we need to overcome.
We are discussing potential long-term contracts with many entities across geographies, but nothing is finalised yet.
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