A: It is true that compared to a well-established entity such as SAIL, Petronet would have been viewed as a start-up back then, in an industry that our country by and large had no experience in. To be honest, I applied without too much deliberation, and was not very sure about the future. Many people told me not to risk it, but I sought the opinions of seniors and industry veterans and received solid advice from the first chief of Petronet, Mr Suresh Mathur, who told me about Petronet’s vision of becoming a leader in the promising gas industry. Since I was a finance and commercial person, technology was not an issue. Petronet was backed by strong oil and gas PSUs and the role was a much bigger one than what I was playing in an already large company, SAIL – therefore, I decided to give it a go.
A: Petronet was a totally new venture – so whatever we were doing was for the first time in our country. There were the usual challenges of signing gas-sales agreements with RasGas, off-take agreements with customers, and moving ahead with the Dahej project effectively. Imported LNG cost was almost double domestic APM gas back then, so there was a concern whether it could be marketed in India at all. Not only was the ability to efficiently operate an LNG terminal not a given, project financing was also impacted by issues at Enron who was developing the Dabhol LNG terminal. In fact, promoters were not willing to guarantee the funding. We were not able to finalise the equity too, as it was clear that Petronet would be a private entity and we were not able to get other stakeholders quickly. However, there was a strong desire to excel under these circumstances. Promoters, authorities, and other stakeholders provided a lot of support. We were able to rope in ADB financing, thanks to the pro-activeness of our then Director Finance, Mr Prosad Dasgupta, who later became the MD. GDF had also bought 10% stake in the company. Hence, one by one, we were able to overcome the many hurdles.
A: There were many major challenges, but an interesting one, I want to mention was about equity funding. We had a nominal share capital of Rs 3,600 which represented 60% stake of the promoters and GDF, while the remaining 40% was allotted in the name of four promoter group employees. When the Companies Act was amended in 2002 with a minimum Rs 5 lakhs (Rs 500,000) share capital, we could not take more than Rs 3 lakhs from the promoters and GDF, as that could make Petronet a PSU. So, their remaining amount was share money pending allotment. We still had to tie up Rs 2 lakhs. Ultimately, five senior Petronet employees were asked to contribute Rs 40,000 each, which we agreed to, despite being unsure of the company’s future at the time.
A: We were able to tie up 65% of equity funding from the promoters, GDF and ADB but for the remaining 35% we decided we would go for an IPO. While the IPO posed its own challenges – merchant bankers not giving it more than Rs 12 a share versus our estimate of Rs 15; when it was launched, it received an overwhelming response with more than 7 lakh (700,000) investors subscribing and that too at Rs 15 per share. By that time, we were also able to tie up project financing fully besides signing off-take agreements with our promoters cum off-takers. The Dahej terminal was also getting ready. So by 2004, we had things falling into place.
A: The boost actually came from customers using liquid fuels, as crude oil prices started rising from 2004-05. LNG became increasingly economical due to the cap-and-floor pricing mechanism and customers started coming in. Natural gas is an addictive fuel – once you get the benefits of low maintenance, uninterrupted supply, and cleaner surroundings, it is difficult to go back to liquid or solid fuels, unless economics turn out to be highly unfavourable. In fact, in 2005-06 itself we discussed expanding the Dahej terminal.
A: I believe a major factor has been the lean structure and management’s autonomy which led to fast decision making. Despite having the petroleum secretary as the company’s chairman, and large rival oil and gas PSUs as promoters, there were no bureaucratic or procedural hurdles. We had full independence. Petronet has only 450 employees even now across Delhi, Dahej, and Kochi. Secondly, the company consciously decided to lower its risk through contracts management. That’s why there are back-to-back binding agreements with suppliers and off-takers, with no price or volume related risks. Our only focus was to run plants as optimally as possible, and we were able to do this. Today, Dahej is one of the largest re-gas terminals globally, with probably the highest utilisation levels.
Another thing was the presence in Gujarat. During the last decade, Gujarat has grown significantly in terms of industrialisation and was moving towards a gas based economy. Gujarat had very friendly policies coupled with fast approval processes and limited labour issues. This led to considerable growth in gas usage, which helped Petronet to clock higher sales.
A: To be honest, no. As I mentioned, it was such a nascent sector back then that Petronet’s very survival was in question. We just moved ahead. In fact, we made a definite business plan in a structured way only in 2010-11. Until 2010, it was unchartered territory every day. In terms of financial goals, too, there were no definite profitability targets. Our mandate was to move the project forward and operate the terminal optimally. In terms of returns, we targeted 16% equity IRR.
A: Kochi terminal was on the cards since 1999 when Petronet started out. From the very beginning, Petronet has targeted both northern and southern markets. In fact, the company signed 7.5mn tonnes with RasGas back then, out of which 2.5mn tonnes were to be imported into Kochi. While discussions on the gas-demand scenario in the south abounded, there was definitely a case for gas, especially from the power sector. In Kerala, due to environmental considerations, coal-based power was not supported. The Kayamkulam plant, which was supposed to be one of Kochi terminal’s anchor customers, was to run on gas. Even in terms of pipelines there were no issues earlier. It was only later that local issues emerged driven by socio-political considerations and concerns about safety, especially after a major incident took place in another pipeline in the region. Work on the terminal and the pipeline had started simultaneously, and was to be ready by year 2013. However, due to escalation of tensions within the region, the pipeline could not be completed on time.
A: The Mangalore section of the pipeline is under active progress and is likely to be ready by the end of 2018. I believe that by that time, the terminal may clock almost 2mn tonnes of annual volumes, a level at which it is likely to breakeven in terms of profit before tax as Kochi terminal debts will also be repaid by then. Besides, discussions have also started on the Bangalore section through Tamil Nadu. Hence, there could be a positive outcome on that front too. Kochi terminal is a strategic asset and Petronet remains fully committed to it.
A: Earlier, oil prices had risen steeply to more than USD 100 a barrel and some estimates predicted even further increases. We consciously decided to minimise such risks and bring an element of stickiness into our pricing – the reason we went for average pricing. Unfortunately, we, like many other industry players, could not predict the collapse of oil prices because of the shale-oil revolution, and had to suffer high LNG prices for some time. However, our supplier RasGas acknowledged our predicament and we were able to negotiate changes to the formula so that it was more in line with prevailing oil prices. The Indian government also provided us with immense support.
A: Presently, Petronet is looking at setting up LNG terminals in neighbouring countries such as Bangladesh and Sri Lanka, besides entering the LNG retail space in India – both opportunities are under discussion. Petronet is planning to market LNG as a retail fuel for trucks and other vehicles,though I believe it would probably take five to ten years to meaningfully contribute to the company’s profitability. With policy support, growth in this can be accelerated. The company already has the Taral brand name for direct supply of LNG, and plans to use it for future retail endeavours.
A: The competition is coming in, especially in Gujarat where multiple terminals are expected to be commissioned. However, Dahej still stands on firm ground, as it will continue to be the cheapest in terms of tariff and with 17.5 mn tonnes of annual capacity tied up, including the Gorgon contract. I do not see any cause for concern so far. However, the Dahej terminal would probably peak at 20mn tonnes capacity, and taking it beyond this level in a single location may not be prudent. There is some caution on expanding in Gujarat due to the new terminals coming up. Plans in Gangavaram are currently on hold, considering a couple of new terminals coming up in the east coast too– Petronet is looking for capacity commitments for Gangavaram before moving ahead. However there are upsides in Kochi. The company is also open to joint ventures with other companies, and favours associations with other LNG terminals. Petronet has the cash as well as expertise, and I believe, is in a strong position to add value as a partner to new terminals.
A: I believe that by that time, demand will pick up and absorb this incremental gas. Pipeline connectivity to the east is already underway, which can open up a big market. The power sector will also absorb some of this supply. As the southern market is relatively under-penetrated, there is demand scope from the south. There could be some negative impact on utilisation levels of new terminals. However, Dahej is fully tied up – off-takers will somehow manage to uplift their commitments and Kochi will see demand, at least from Mangalore. In the current supply situation, incremental gas, whether domestic or LNG, goes into the grid; so an imbalance affects other sources. I believe some supplies are being made to fertiliser plants, but over a period, the market will be balanced. As the off-takers have binding commitments and being market makers themselves, I do not see any concern on volumes.
A: The government is committed to further the usage of gas in India. It has already stated its desire to double the share of gas in India’s primary energy basket to 15%. This is a significant number, but possible with right policies that include more investment in pipeline infrastructure, revival of fertiliser and power plants, and fiscal support including capital subsidy. A lot of this is already underway. However, revival of power plants is crucial for longer-term growth of the gas sector. The government may support this through purchase obligations of gas-based power, similar to renewables. Other than power and fertiliser, it is economics that will drive demand from sectors such as refineries, petrochemicals, city gas, and industries. I believe gas consumption in these sectors will keep growing with economic growth. Currently, global LNG prices have also been supportive of demand.
A: There were setbacks, but over the years, the achievements have beaten expectations manifold, so I do not think of regrets but rather look more at the positives. I am an optimistic person and right from the beginning I have taken an affirmative view on Petronet and the LNG sector in India. We were able to develop a massive knowledge base and skill sets in LNG in India, and the country is now an important part of the global LNG industry. I remember, we used to get technical support from GDF initially, but later provided them our expertise in return. Even in shipping, we were able to bring skill sets from global players to our domestic operators. In this journey, every stakeholder has delivered.
A: In the last thirteen years, since Petronet’s IPO, everyone has gained from its success. It is a long-term business, and though there will be short-term ups and downs, the company will do its best to deliver. Currently, Petronet is in a strong position and I believe, will be ready for future opportunities.
A: I want to pass on my knowledge to others – with the first priority being to Petronet, of course. I have not made any definite plans, but am open to new challenges.
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