Analysis: GAIL's new strategy should be rewarding

GAIL should benefit hugely by changing its focus from being just a gas transporter to a gas trader

Since the industrial revolution in early 19th century in Europe, fuels have played a very important role in driving the global growth engine. It generally takes one fuel to drive global growth for one century. The revolution started with coal as a fuel, which was replaced by oil nearly a century later. Nuclear fuel was considered by many to replace oil, but due to its non-peaceful applications its growth has been deliberately stalled by those having access to the technology. Gas, has thus, replaced nuclear as the fuel that will drive growth engines in the present century.

With the advent of shale gas, the usage of oil has largely been substituted by gas at least in the US. Other countries are expected to follow soon. The use of oil is expected to reduce from being a fuel to a feed for petrochemicals only, especially polymers and polyesters.

Given this basis, the recent move by India’s largest gas distributor GAIL (India) is commendable. It is reported that the company is gradually changing its focus from transportation of gas to trading of gas. The motive behind this move is to reduce its dependence on the regulated business and free itself from subsidy sharing.

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Over the last one year, the company has managed to post growth on account of importing gas on contractual basis and selling it in the spot market in India at a higher price. In the previous fiscal, the company sold 1.5 million tonne of LNG (liquified natural gas) out of which 0.7 mn tonne were imported through 12 LNG cargoes. This year the company intends to increase imports to 2 mn tonne by importing 34 cargoes and divert another 0.6 mn tonne from its existing source towards trading.

 

Thanks to the Reliance Industries’ KG basin gas find, power and fertiliser facilities had cropped up along the distribution line. But with RIL now producing less than 15 mmscmd against expectation of over 80 mmscmd, most of these facilities are now mothballed and awaiting gas supply. None of the 25 RIL’s KG basin based power plants in Andhra Pradesh alone are operating. Over Rs 75,000 crore worth of assets in various states are impacted due to lack of gas supplies.

Even though GAIL’s motive of moving to gas trading has helped its dependence on regulated business to come down from 50 per cent to 35 per cent, the opportunity in front of it is too huge to ignore. GAIL has the benefit of its size. Its bulk purchases help the company in striking a better deal as compared to other players in the industry. The company has created and is increasing its capacity to store and distribute gas around the country.

If gas is going to be the fuel of the century, GAIL is positioning itself to ride the boom.