Petronet LNG: Street may await clarity over possible policy changes

There is 95-100 per cent utilisation at Petronet's Dahej terminal whereas other terminals are under-utilised

A new consultation paper from the Petroleum and Natural Gas Regulatory Board (PNGRB), ‘Optimising LNG supplies from terminals in India’, indicates that Petronet LNG faces regulatory risk, due to the regulator wishing to control regasification tariff.  At the moment, these are levied by agreements between the operator and customer.  The change would require amendment to the PNGRB Act but may or may not occur. If it does, it reduces Petronet’s pricing power. If tariff regulation does occur, it may also inhibit investment into liquefied natural gas (LNG) terminals.  There is 95-100 per cent utilisation at Petronet’s Dahej terminal. But other terminals are under-utilised. Some third parties have complained they cannot access the Dahej terminal and there is poor pipeline connectivity for other terminals.  PNGRB argues that larger capacity (and high utilisation) should lead to a reduction in regasification tariffs but terminals with lower utilisations are charging similar tariffs to Dahej.  On its part, Petronet LNG claims the Dahej regasification tariff is the lowest in India, and LNG regasification charges are just 5-6 per cent of delivered gas prices to customers.  Petronet LNG promoters are also major off-takers for Qatar and Gorgon contracts. Hence, limited volume is left for other terminals.  Most LNG volumes are sold to state-owned entities like fertiliser plants (gas cost is pass-through). The report also argues for separation of ownership of terminals and marketing entities.  There are seven operating LNG terminals, with a cumulative capacity of 48 million metric tonnes per annum (mmtpa) and a cumulative investment of Rs 37,000 crore.  Given LNG imports of 21.4 mmtpa, overall utilisation was just 50 per cent in FY24.  Dahej and Hazira terminals have 98 per cent and 67 per cent capacity utilisation over FY16-FY23. All other terminals have utilisation of 26 per cent.  The high utilisation at Dahej is driven by good pipeline connectivity and proximity to Gujarat where gas demand is strong.  Even if regasification charges at Dahej terminal are controlled, there may not be utilisation benefits for other terminals until pipeline infrastructure improves and capacity at other terminals scales up.  There is LNG regasification capacity of 47.7 mmtpa. Under-construction and planned projects could take it to 87 mmtpa but expected LNG import demand is 56 mmtpa.  The new capacity includes 5 mmtpa each at Dahej and Charra, which will be available within a few months.  PNGRB says Petronet hikes regasification by around 5 per cent every year. PNGRB proposes it should have regulatory oversight over regasification (and other charges of LNG terminals), to ensure availability to customers at reasonable rates, and increase utilisation of all terminals.  Given policy emphasis on gas usage at affordable prices, the recommendation may be seen favourably. Apart from regasification tariffs, some terminals also charge high gas handling costs and LNG truck loading charges equal to the regasification tariff, and also negotiate destination-specific contracts.  Gas traffic from West Coast to East Coast leads to higher compression costs for GAIL, which recovers the tariffs from customers.  PNGRB claims customers complain about unreasonable regasification tariff for third parties (which are not Petronet stakeholders), difficulty in getting access to third-party cargoes and lack of real-time information, among others.  If acted upon, the report would weaken the pricing power of Petronet.  The revised 7.5 mmtpa Qatar contract starting 2028 has destination flexibility and the entire volume may not be delivered at Dahej.  Investors may be cautious until policy responses to the report are known.