Gas industry: Great potential for long-term structural growth

November 2017

Oil and gas

Expert Speak

Gas industry – the new beanstalk?

Great potential for long-term structural growth

Jack and the Beanstalk,

Jack’s magical beans turn into a beanstalk, reaching into the

skies overnight. The beanstalk becomes an enabler to a ‘lived happily ever after’ story.

The Gas industry in India could very much be such a beanstalk, believes Mr Darshan

Hiranandani, the Managing Director and Chief Executive Officer of H-Energy.

Key takeaways from our recent conference call with Mr Hiranandani:

Mr Darshan Hiranandani

MD, H-Energy

Mr Hiranandani heads the

energy venture of the

Hiranandani group. He holds a

Masters degree, with a major

in Entrepreneurship and

Finance from the Rochester

Institute of Technology, USA.

Under his able leadership, the

company has ventured into

LNG regas terminals and

natural gas pipeline projects in

India. The company also plans

to develop a liquefaction

project and crude oil

infrastructure in Canada.

The company has chartered a

4 MMTPA Floating Storage

and Re-gasification Unit

(FSRU) from Engie. The FSRU is

expected to be docked at

Jaigarh port from mid-2018.

Jetty construction has been

ongoing since 2017. The EPCM

(Engineering, Procurement,

Constructions and

Management) contract for tie-

in line has been awarded to

Engineers India Limited for

completion of 60km pipeline

from Jaigarh to the existing

Dabhol gas grid. It is also

planning a 635km Natural Gas

pipeline from Jaigarh to

Mangalore with a capacity of

17mmscmd.

Gas is what Telecom was 20 years ago

Lack of a free market and infrastructure in India has constrained the development of

the Gas sector. While coal, petcoke and fuel oil are cheaper alternatives, natural gas is

more economical than alternatives like diesel and naphtha. Then, there is the added

advantage of convenience in terms of continuous supply, consistent quality and no

requirement of storage/inventory. However, the current scenario of a monopolistic

regime and onerous contracts is discouraging. Several small and medium enterprises

prefer to stay away from usage of natural gas, even if it means higher cost and

inconvenience. Going forward, emergence of new market players would increase the

options for the buyers and aid the development of the sector. The regulatory board is

also looking into unbundling of transmission and marketing, which could further open

up the sector for smaller players. The Gas industry is all set to see the transformation

that the Telecom industry has gone through in the last two decades (Exhibit 1).

Huge unmet demand

Along the upcoming Jaigarh-Mangalore route itself, H-Energy believes there are

~27,000 industrial consumers. Till date, as per Petroleum Planning & Analysis Cell, only

~7,000 consumers have been connected across India, many of whom might not even

be taking gas all the time. Due to lack of pipeline infrastructure, virtual grids through

Liquified CNG (LCNG) cascades could improve consumption of gas tremendously. The

company has signed master agreements with consumers in several industries for

supply of gas. Several industrial consumers are still paying INR7/kwh+ for their

electricity consumption. LNG could offer good potential in such cases.

Changed global scenario is a perfect enabler

After a long time, we are facing a global glut in supply. The glut has resulted in several

new trends – destination-free contracts, flexible shipping contracts, storage and

trading of LNG, and contracts linked with other commodities like coal and ammonia

instead of conventional oil and gas linked contracts. India is all set to take advantage of

the same with upcoming LNG terminals and FSRUs, and expansion of pipeline

infrastructure.

LNG as transport fuel could open new opportunities

LNG trucks can run as much as 1,000km on a single fill and LNG is 18-20% cheaper than diesel. LNG has been in

usage in China for long as transportation fuel. China has ~240,000 LNG trucks and ~3,500 LNG re-fueling stations.

India approved LNG as a transportation fuel early this year. Only a few weeks ago, the guidelines for opening of

refueling stations have been ratified. H-Energy expects ~10 refueling stations to be added in a year. The company

itself may open five stations. While electric vehicles (EVs) could pose a threat, they do not offer any solution for

heavy cargo movement – heavy trucks could require a 250kg battery pack for just a 50km range! The two leading

heavy vehicle manufacturers in the country are also looking at rolling out LNG buses in the coming months.

Swarnendu Bhushan – Research Analyst

(Swarnendu.Bhushan@MotilalOswal.com); +91 22 6129 1529

Abhinil Dahiwale – Research Analyst

(Abhinil.Dahiwale@MotilalOswal.com); +91 22 3980 4309

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20 November 2017