Why proposed change in gas tariff calculation would impact GAIL’s earnings
The new gas tariff proposal based on the cumulative transmission capacity is expected to prune GAIL (India)’s earnings by over 25 per cent. This together with lower domestic gas demand due to economic slowdown may affect its stock in the near term. It has underperformed the Nifty Energy index by 6 per cent in the past three months. In the last week of June, the Petroleum and Natural Gas Regulatory Board (PNGRB) proposed a new gas tariff structure wherein the volume divisor in the tariff equation will be based on the total gas transmission capacity of a company. The volume divisor helps in ascertaining the utilisation rate of the pipeline depending upon its age. For instance, in the case of a pipeline with a capacity of 10 million standard cubic metres per day (mmscmd), the regulator may consider 30 per cent utilization rate in the first year, 40 per cent in the second year and gradually increasing it from thereon. Typically, the utilization rate after the fifth year of operation is fixed at either 75 per cent of the normative capacity or actual utilization, whichever is higher. At present, the gas tariff of a pipeline is computed using the discounted cash flow method based on the projected volume transmission, capital expenditure incurred and operating expenses. Under the proposed unified or pooling method, the pipeline tariff will be computed by pooling capital expenditure and operating expenses of all the cross-country pipelines of a company and apportioning them over the cumulative volume in such a way that allows 12 per cent after tax return. In the case of GAIL, pipelines such as Jagdishpur-Haldia-Bokaro and Chainssa-Jhajjar have no source of gas so far. Therefore, the proposed method of adding all the pipeline capacities together will inflate the volume divisor thereby resulting in lower tariff and reduced return on investment. Of the total gas transmission capacity of 235 mmscmd of GAIL, nearly one-third has no gas source. Hence, the company’s actual transmission volume may be less than 40 per cent of the volume divisor. This would bring down the after tax return below the proposed rate of 12 per cent. According to Nomura, if the proposed unified tariff were to be implemented, GAIL’s average transmission tariff may decline by over 20-30 per cent. GAIL transmitted 109 mmscmd of gas in FY20. Analysts expect around 7 per cent volume drop at 101-102 mmscmd for the current fiscal following lower demand. This will further widen the gap between the actual utilization and the normative utilization considered by the regulator. Given a spate of overhangs on the earnings due to unified tariff, probable loss on the US gas contracts and petrochemicals, the street may shift to the stock’s valuation based on the book value compared with the sum of parts method. At Monday’s closing price of Rs 103.7, the stock was traded at 1.1 times its trailing book value. While this looks attractive, the uncertainty over the proposed regulations may affect the stock’s near term movement.
Gas boom risks ‘perfect storm’ for climate, economy: report
Global natural gas capacity under construction has doubled in a year according to new analysis that warned Tuesday the investment boom in the world’s fastest-growing fuel risks a “perfect storm” of climate chaos and stranded assets. Capital expenditure on liquefied natural gas (LNG) facilities has surged from $82.8 billion to $196.1 billion over the last 12 months, according to a report by Global Energy Monitor. Following a string of divestments from high-profile LNG funders, the report warned that at least two dozen projects were recently cancelled or are in serious financial difficulty. “LNG was once considered a safe bet for investors,” said Greg Aitken, research analyst at Global Energy Monitor. “Not only was it considered a climate-friendly fuel, but there was substantial governmental support to make sure that these mega-projects were shepherded to completion with all the billions they needed. “Suddenly the industry is beset with problems,” Aitken said. As the coronavirus pandemic squeezes investors and a growing social movement against new gas projects gathers pace, the report said troubled projects were facing a range of difficulties in sustaining finance. In the past year Berkshire Hathaway and the governments of Sweden and Ireland were among financiers to drop several billion dollars worth of gas project funding, it noted. – ‘Economically unsound decision’ – While its proponents push LNG as a “bridge fuel” because it is less polluting than coal, a new gas-fired power plant has roughly the same environmental impact as a new coal plant, given the leakage of methane throughout the supply line. Methane is dozens of times more potent a greenhouse gas than carbon dioxide over a 100-year time scale. The landmark 2015 Paris climate deal enjoined nations to limit global temperature rises to “well below” two degrees Celsius (3.6 Fahrenheit) over pre-Industrial Revolution levels. The accord also commits countries to work towards a safer warming cap of 1.5 degrees Celcius. According to the Intergovernmental Panel on Climate Change (IPCC), the safest and surest way to reach the 1.5 degrees Celcius goal would require a 15 percent decline in gas use by 2030 and a fall of 43 percent by 2040. Global Energy Monitor said that any new gas infrastructure “directly contradicts the Paris climate goals”. The European Investment Bank (EIB) — the world’s largest multilateral lender — said last year it was ceasing funding for nearly all new fossil fuel projects. EIB vice-president Andrew McDowell said investing in new LNG capacity “is increasingly an economically unsound decision”. “We need to take advantage of opportunities that put us firmly on the path to reaching net-zero by 2050 whilst securing more jobs in the short and long term,” he told AFP. “This will undoubtedly be challenging, and it can’t be instant. But it must happen.”
Global LNG projects jeopardized by climate concerns, pandemic delays: report
Prospects for nearly half of the world’s projects to build infrastructure for exporting liquefied natural gas have faltered in recent months, amid rising concerns about climate change, public protests and delays due to the coronavirus pandemic, according to a report published Tuesday. Out of 45 major LNG export projects in pre-construction development globally, at least 20 – representing a capital outlay of some $292 billion – are now facing delays to their financing, researchers at Global Energy Monitor found. That marks a stark shift by investors away from what many had considered a promising fuel market, already buffeted by slower growth in demand, rising competition from renewable energy technologies and opposition over the industry’s climate-warming emissions. The vice president of the European Investment Bank said the report underlined the unacceptable risk of investing in LNG assets. “Investing in new fossil fuel infrastructure like liquefied natural gas (LNG) terminals is increasingly an economically unsound decision,” Andrew McDowell told Reuters in an email. The bank had announced in November that it would stop financing fossil fuel projects at the end of 2021. The LNG industry has made big bets on a more positive outlook, as many analysts have predicted that demand would outstrip supply sometime in the next decade. Companies committed $160 billion to $170 billion to new LNG export terminal construction around the world in 2019, almost triple the roughly $65 billion committed in 2018, said researchers at the San Francisco-based non-profit research group. In total, companies had announced plans to build $758 billion of projects that are as yet in the pre-construction phase. But with 20 projects now in jeopardy, including nine in the United States, that planned capital outlay could be reduced by $292 billion, or 38 per cent, if the delays persist indefinitely, the researchers told Reuters. “LNG infrastructure faces the risk of becoming stranded assets and should be avoided,” said Erik Fransson, head of the fund department at the Swedish Pensions Agency, which has $12 billion of assets under management. Meanwhile, the pace of LNG terminal development has been pushed back by at least 18 months since the pandemic, the authors said. “The sector is really shut down at the moment in terms of advancing further new projects,” report co-author Ted Nace, executive director of Global Energy Monitor, told Reuters. LNG investment has had strong government support in many countries. And oil companies in the United States, Europe and elsewhere still plan to boost LNG exports over the next decade. That has raised worries that resulting emissions of carbon dioxide and methane could make it harder to achieve the temperature goals in the 2015 Paris climate accord. Though burning natural gas emits less planet-warming carbon dioxide than coal per unit of energy produced, climate scientists have warned that the industry’s rapid growth as well as leaks of methane – a potent greenhouse gas – threaten progress in limiting climate change. As for future projects, 12 companies had said at the start of this year that they planned to make final investment decisions in 2020 to build new LNG export plants in North America, according to a Reuters survey. That total is now down to four, and analysts only expect one project to move forward this year.
Gas exporters book 90 per cent capacity of key pipeline link from Russia via Poland: auction results
Gas exporters have booked almost 90 per cent of the capacity of the Yamal-Europe pipeline’s Polish section in the period from Oct. 1 this year and Sept. 30 2021, data showed on Monday, suggesting Russia will continue to pump gas to Europe via the link. A gas transit deal between Russia and Poland dating back to the 1990s expired on May 17 as Warsaw aligned its energy regulations with European Union rules and moved to curb its decades-old dependence on Russian fuel. Since then Poland’s gas grid operator has started selling capacity on the Yamal pipeline that carries Russian gas from the northern Yamal peninsula to Poland and on to Germany via auctions. The auction results in May showed that about 92 per cent of capacity has been booked for June and roughly 80 per cent for the quarter starting on July 1. In May, when capacity was available in partial-day or daily auctions, the flows via the pipeline fell significantly. “Almost 90 per cent of the capacity at the Yamal pipeline was booked for the year between Oct. 1 2020 and Sept. 30 2021, almost everything that was available,” said a spokeswoman at Poland’s gas grid operator Gaz-System. She declined to reveal names of companies that booked capacity. A Polish official responsible for energy infrastructure said in May that he expected Gazprom to continue gas transit via Poland, considering potential delays in the Nord Stream 2 undersea pipeline expected early next year. Russian gas giant Gazprom did not respond to a request for comment on Monday. The end of the transit deal in May had no impact on Russian gas supplies to Poland, which are based on a separate contract. The Yamal pipeline has annual capacity of 33 billion cubic metres (bcm) in Poland.