Brookfield is leading the race to buy Mukesh Ambani's East West Pipeline

Canadian financial powerhouse Brookfield is leading the race to acquire the gas pipeline owned by East West Pipeline (EWPL), which was earlier known as Reliance Gas Transportation Infrastructure. This makes it one of the first acquisitions by the Canadian firm in the Indian oil and gas infrastructure sector.

The 1,400-km pipeline, owned by Mukesh Ambani’s holding companies, connects Kakinada on Andhra coast to Bharuch in Gujarat. The pipeline will be critical for the joint venture project of Reliance Industries (RIL), BP and Niko Resources at the Krishna Godavari-D6 basin, which is expected to increase production in 2020.

EWPL also caters to the transportation needs of other gas sources, including regassified liquefied natural gas (RLNG) terminals along the stretch of the pipeline. The pipeline is connected to pipelines of other operators like GAIL and Gujarat State Petronet for onward delivery of gas to other parts of India. The company, however, failed to make money due to low gas production from RIL’s Krishna Godavari basin. When contacted, Brookfield declined to comment.

If the deal goes through, the acquisition by the Canadian firm would be made via Brookfield’s InvIT fund, which invests in critical infrastructure and real estate funds in India. Brookfield has already acquired 21 million sq ft of office space in India and also bought 700 km of toll roads from Gammon and KMC Constructions. Besides, it has presence in real estate projects and inked an MoU with State Bank of India in the distressed asset space.

The valuation of the pipeline is not known. Insiders said in fiscal 2018, EWPL had made a net loss of Rs 7.15 billion on a revenue of Rs 8.85 billion.

Possibly, in order to facilitate the sale, in July this year, EWPL decided to demerge its pipeline infrastructure to Pipeline Infrastructure Pvt Ltd (PIPL), which would be sold to Brookfield.  

How the Canadian firm will turn around the company, however, is a big question. Analysts said the pipeline’s cash flow is sensitive to the volume of the gas available for transportation. The low volume has reduced its capacity utilisation and revenue, thus impacting cash accruals. 

This was mainly because there has been a significant drop in RIL’s gas production from its KG-D6 block over the past few years, which has constrained its cash flows.

The average production was about 4.1 million metric standard cubic metre per day (mmscmd) in the first quarter of fiscal 2019, down from about 8 mmscmd in fiscal 2017 and about 12 mmscmd in fiscal 2014 to fiscal 2016, which in turn was significantly lower than the 26 mmscmd in fiscal 2013.

But insiders said gas volumes are expected to increase after RIL and BP’s joint deep-water gas-field project commences production from new fields. The transportation of gas by the pipeline will depend on the extent to which RIL and other gas producers raise production levels, as well as the RLNG sourced by customers.

In June 2018, EWPL had announced the demerger of its investment division to Sikka Ports & Terminals Ltd which will result in transfer of Rs 35 billion of non-convertible debentures to Sikka Ports (earlier known as Reliance Ports).