Bengaluru: ONGC on Wednesday entered into an MoU with Super Wave Technology Pvt Ltd (SWTPL), a company incorporated by the Society for Innovation and Development, Indian Institute of Science (IISc), Bengaluru, for carrying out research and development (R&D) on alternative technology for hydraulic fracturing.
The historic event at IISc, Bengaluru, was attended by Prime Minister Narendra Modi, Minister of State (Independent Charge) for Petroleum & Natural Gas Dharmendra Pradhan, oil & gas secretary Sourabh Chandra, ONGC CMD Dinesh K Sarraf, Director (Technology & Field Services) Shashi Shanker, IISc Director Prof Anurag Kumar and SWTPL Director Prof Gopalan Jagadeesh. The MoU was signed by Shanker on behalf of ONGC and Prof K P J Reddy on behalf of SWTPL.
With this partnership, ONGC will provide assistance to SWTPL for developing Shock Wave-Assisted Fracking Technology, an alternative to conventional hydraulic fracturing which, if proven effective as a substitute to hydraulic fracturing — in particular for shale gas exploitation — will be a game changer for the oil & gas industry.
Hydraulic fracturing needs huge amounts of fresh water and energy for pumping at very high pressures. After hydraulic fracturing, a well produces substantial quantities of effluent water which need to be disposed. The global oil & gas industry has been searching for an alternative technique for fracturing which would require little or no water. Shock waves are one of the most efficient energy dissipation phenomena. The sudden release of massive amounts of energy in a miniscule space domain triggers the formation of these waves. The impulse generated by these waves can be used for many interesting and innovative applications.
In the project with ONGC, SWTPL proposes to use shock/ blast waves for initiating fractures/
features in sandstone/ shale reservoirs located initially at depths of 1,000-1,500 m. The MoU signed on Wednesday would provide an impetus to the development and field implementation of shock waves technology for oil & gas fields.
(Source: Millennium Post February 19, 2015)
PETROLEUM MINISTRY PROPOSES GAS POOLING FOR FERTILIZER PLANTS
NEW DELHI: The ministry of petroleum & natural gas has proposed a mechanism to pool domestically-available natural gas and costlier imported liquefied natural gas (LNG) to improve supply at affordable prices for urea manufacturers.
Of the 30 urea producing plants, 27 are gas-based and three run on naphtha as fuel. In a year, India consumes 30 million tonnes of urea . Between April and December 2014, fertiliser plants consumed 42 million standard cubic metres a day (mscmd) for manufacturing urea. Of this, 26 mscmd comes from domestic fields and 16 mscmd is imported LNG.
The ministry has proposed waiving customs duty on imported LNG for fertiliser plants; granting ‘declared goods’ status for natural gas to allow four per cent central sales tax, instead of state sales tax at differential rates; and waiving service tax on imported LNG that will be pooled.
The steps are expected to reduce the cost of imported LNG by $0.75 a million British thermal units (mBtu). Domestic gas used by fertiliser plants is currently priced at one-third the price of imported LNG. The ministry has sought inter-ministerial consultations on the proposal that would be put up to the Cabinet later for its approval.
As part of the plan, an Empowered Pool Management Committee would be formed with representatives of the ministry of petroleum & natural gas, department of fertilizer, department of expenditure, and GAIL (India). The committee would approve the plant-wise gas supplies to be made under the gas pool mechanism.
The department of fertilizer will also determine the total requirement of natural gas. The ministry has proposed making GAIL the pool operator, to arrange imports after considering domestic availability and averaging both the prices. Officials said the ministry had proposed the mechanism be effective from April 1.
Under the scheme, fertiliser customers will pay suppliers according to existing contracts. The difference between the pooled price declared by GAIL and the actual delivered price paid by fertiliser customers will be paid to a Pool Fund Account or reimbursed from it.
(Source: Business Standard, February 19, 2015)
GOVT WANTS TO DEVELOP A MODEL THAT IS PROGRESSIVE: DHARMENDRA PRADHAN
Minister of State (Independent charge) for Petroleum and Natural Gas Dharmendra Pradhan took to the podium at the Business Standard Infrastructure Summit on 15 January and spoke about the various challenges facing the fuel sector and the policies being formed by the government to meet these. Excerpts from the speech:
Railway Minister Shri Suresh Prabhu has spoken on this platform before me. Shri Prabhu is a special personality in the area of policymaking. He has a lot of experience.
Every person here has his own opinion on the infrastructure sector. We have been associated with it for the past many years as administrators, making policies, implementing and improving them, too.
I have been handling the work of the petroleum ministry for the past eight months.
I have been reflecting upon and analysing my own experience of the past 33 years as a social and political worker and also as a student of social science. There has been a fundamental shift in the country’s economy since early 1990s. If you look at land acquisition as a case study within the gambit of infrastructure, you will be looking at four-five major subjects. These include land, capital, energy, market and policy. If we create a cocktail of all these issues, we get the overall picture of the country’s infrastructure and the economy.
I started my social life as a student. I come from Odisha – perhaps the only part of the country where 25,000 hectares of land has been acquired by the government over the past 50 years. It is a major coal mining area in and around Talcher and Angul districts. This land has been acquired for multiple purposes including irrigation, power, steel, aluminium and coal mining projects. I belong to the place where maximum coal mining happens. This is the area where opencast mining started in 1960s.
As a political worker, I had to learn the issues associated with coal mining. I became the representative of the area in the Odisha Assembly, and later the Rajya Sabha. I tend to evaluate my own role in the socio-political arena of mining and economy. I started understanding the nitty-gritty of these issues in the 1980s before the first major fundamental shift in the economy happened in 1990s.
The economy was opened up in the early 1990s and the government had to invite non-state capital in infrastructure development. Looking at all of this, I believe the biggest challenge before the current government is to evolve and implement a transparent policy. While the economy was opened up in a few sectors, we created the framework of principles guiding our policy-making based on a socialised pattern. There was a framework of what should be the state’s role, intervention and responsibility. A state-centric economy must have been a necessity in those early days. Now, while we have integrated into the global development agenda and pattern of growth, the required change in the infrastructure-related policies could not be achieved. I personally believe the reason for this failure to achieve the required transition in economic policy-making was lack of experience. We could not properly visualise the path of reforms and the benefits accruing from it.
Shri Dattopant Thengadiji was one the major influential thinkers whose speeches I listened to in the early 1990s. One of his concerns was democracy becoming a victim of a market-based economy.
But I want to ask: Should we not welcome a market-based economy? Openness in the economy should have come but the policymakers failed to visualise it. This, I believe, may have been a genuine mistake.
There have been a few good examples, too. If the electricity sector was not reformed, the country would have been in the dark today. The benefits from NTPC’s performance, however good, may have been limited if independent power producers (IPPs) had not entered the sector. But the policymakers did not think properly on how to take the benefit of reforms flowing from the Electricity Act of 2003 forward. This is particularly true in the lack of initiatives taken over the past few years on the area of fuel supply and availability. The nation is today bearing the brunt of that inaction.
Over the past 20 years, we have been opting for international bidding as a route to award of oil and gas blocks under the New Exploration Licensing Policy. This policy provides for 100 per cent foreign direct investment. We have formulated a production-sharing contract (PSC) for sharing of benefits.
This policy was criticised.
While the government has awarded over 100 assets under NELP, monetisation has happened in only two to three assets. The Comptroller and Auditor General of India also made some observations on the PSC.
Today, policy-makers tend to think that PSC is the devil’s document and must be scrapped. But is there a successful alternative model for PSC available globally? The current government wants to develop and implement a model that is progressive. We do not want to bind ourselves with the PSC model alone. At the same time, we do not think revenue sharing is the only model. We want to adopt a model that is best for the country’s economic policy.
People have been suggesting different models from Japan, China and the US. But do any of these economies have a stronger democracy than India?
The challenge for the present day policymakers is to ensure consistency in policy with transparency. We have to sometimes take positions that are unpopular. But this can be done in the larger public interest only by a leader who is honest.
(Source: Business Standard, February 19, 2015)
GOVT TO DECIDE ON SELLOFF IN 3 PSUs
NEW DELHI: The government is expected to decide on selling stake in three blue chip public sector companies — Nalco, Bhel and NMDC — on Thursday after its move to sell shares in IndianOil and ONGC have run into rough weather in the wake of low oil prices.
The finance ministry has proposed a sale of 10% each in state-run mining firm NMDC and aluminum maker Nalco, while recommending a fresh 5% disinvest in heavy engineering major Bhel. Based on Wendesday’s close on the Bombay Stock Exchange, sale of shares in the three companies is expected to fetch close to Rs 10,000 crore.
While the cabinet is scheduled to discuss the proposals on Thursday, it is not clear whether the share sale will be undertaken during the current financial year or is part of the list of PSUs where the government intends to disinvest its equity next year.
During the current financial year, the government is staring at falling short of the target to raise a record Rs 43,000 crore in addition to selling shares in Balco and Hindistan Zinc as well as those of ITC, L&T and Axis Bank that it holds through Specified Undertaking of UTI. So far this year, it has managed to rake in around Rs 24,500 crore, although there are another 45 days before the end of the financial year.
The finance ministry’s failure to sort out the subsidy sharing mechanism is holding up the sale of 5% stake in ONGC, which can help the government raise over Rs 14,000 crore based on current market price and meet the target. The government needs to rework the subsidy formula as ONGC offers discounts to help state refiners cover a part of their losses from selling diesel and kitchen fuel at government-capped rates. This discount has risen from 30% in 2008-09 to 48% in 2013-14. The discount is estimated at $56 on a barrel of crude, which is in addition to levies of $18-19 paid to the government.
Similarly, the proposal to sell 10% in IndianOil has not found favour with the petroleum ministry, which has cited the low international crude price to argue against a fresh sale.
(Source: The Times of India, February 19, 2015)
ONGC, DRILLERS TO FACE OFF ON RATES
Mumbai: State-run Oil and Natural Gas Corporation (ONGC), the country’s largest exploration and production company, is trying to get offshore drilling service providers to cut their prices.
The slump in oil prices has prompted it to seek lower rates from these drillers. At high rig rates and less realisation from crude oil, it would be difficult for ONGC to clock profits. Rates for offshore drills are down 15-20 per cent.
“We already bear a subsidy burden. If the cost of production is high, it will significantly impact us. Thus, we have asked the drillers to lower their rates,” said an ONGC official.
The sharp fall in crude oil prices impacted net profit for the October-December 2014 quarter, halving it to Rs 3,571 crore from Rs 7,126 crore a year before in the same period. Brent crude averaged $77.07 a barrel, reducing ONGC’s realisation to $35.57 a barrel for the quarter. This was after factoring in the discount given to oil marketing companies.
“Globally, the deepwater rig rates are down. What we are asking the drillers is not out of place,” added another senior official. “Existing contracts will not be meddled with. This window is being looked only for new ones.”
Globally, rig rates are down from $600,000 a day to $400,000 a day.
Drillers, however, have not taken this move positively. They argue that when oil prices rise, ONGC does not approach them to raise rates but does so when prices are falling.
“One needs to understand that the operational cost we arrived at when signing a contract includes a lot of parameters such as salary of the crew at the rig, spare parts and logistics, among other things. If we have to lower rates, salaries will have to be cut. This cannot be done so easily,” said an official from Jindal Drilling.
Jindal Drilling has a five-rigs contract for five years at an effective day rate of $119,000, much lower than the $170,000 a day in the international market.
The Greatship Group, which has three rigs with ONGC, said, “If ONGC wants us to cut prices, the flexibility has to be both ways. Plus, all our rigs are new and with latest technology. We do not see a reason to cut prices.”
Companies said drilling was a long process and a price correction in rigs would take time. Going ahead, the industry expects a further correction of 10 per cent in rig prices.
In the domestic market, new rigs are not expected to see correction as the technology provided is the latest but the older rig prices might fall to even $50,000 a day.
(Source: Business Standard February 19, 2015)
OMCs TO SEE INVENTORY GAINS; GAIL DERATING LIKELY: ANTIQUE
Going by the government commentary on subsidies, it is clear that despite the reduction in under-recoveries, companies like ONGC and Oil India are not going to benefit, says Amit Rustagi of Antique Stock Broking.
He adds there is no clarity on whether, in FY16, the same ad-hoc mechanism will continue or whether the government will provide subsidy sharing clarity.
He believes oil marketing companies will see inventory gains going ahead. In the mid-term, earnings of companies like HPCL and BPCL will see significant improvement, says Rustagi.
Below is the verbatim transcript of Amit Rustagi’s interview with Ekta Batra & Anuj Singhal on CNBC-TV18.
Anuj: A word on the subsidy bombshell that the government had in store for both ONGC and Oil India. Market had a bit of fear that something like that would happen but do you think market is a bit sanguine about this considering that in FY16 maybe there would be new formula or you think it is time to actually sell these stocks – both ONGC and Oil India?
A: If we look at the stocks and the bombshell which the government has put on these companies, a clear message is that despite reduction in the under recoveries, companies like ONGC and Oil India are not going to benefit. So, we have to see whether the government is going to provide clarity to investors. Minority shareholders particularly are at the receiving end for these companies as they have been getting shocks every quarter because this quarter we had seen the lowest under-recovery of Rs 160 billion. Despite that upstream companies had the highest sharing of 68 percent and net realisation of these companies were at the lowest of USD 35-38 which was quite shocking for the investors and investors want a sustainable sharing mechanism so that they can take a call on the earning of these companies which are not being provided by the government.
There is no clarity whether in FY16 the ad-hoc mechanism will be continued or government will provide a sharing clarity. So till that time investor should stay away from these stocks and probably Oil India is still relatively safer bet as compared to earnings and multiples. However, ONGC because of its oil exposure in the form of Cairn India and ONGC Videsh Ltd (OVL) is likely to take a earnings hit in the year to come as oil prices are averaging USD 60. So we see that it is trading at around 12x multiple to next year earnings and that is slightly expensive related to its historical multiples. So we will suggest that investor should move from, if they want to take a bet on PSU upstream they should move to Oil India rather than ONGC. However, till the time clarity comes it is beneficial to stay away from these stocks.
Ekta: How did you read the numbers of BPCL, HPCL and Indian Oil Corporation (IOC) and now that we are seeing Brent crude prices tick higher how would it change your numbers that we could see in Q4 versus Q3?
A: When we look at oil marketing companies (OMCs) they have been an interesting play on the market side of the business as well as on the refining side of the business. Last one year we have seen markets have been remaining focused on the marketing side. However, inventory at the refining side and the marketing side was quite a bit of concern. So this year last two quarter we have seen these companies together reporting a loss of almost Rs 150 -180 billion in terms of inventory losses as they corrected their inventory levels to the realigned to the crude level of around USD 40-50 per barrel.
Now oil prices going up or moved up to USD 60 per barrel the inventory losses are a thing of past so Q3 earnings we have seen is likely the bottom of these companies. From Q4 onwards the refining margins are likely to recover; there won’t be any inventory losses going forward or in fact there will be inventory gains. Marketing earnings are quite robust for these companies because they have been able to take the price hikes at the adequate time. So, this time also on the 15th they have also increased the prices of petrol and diesel to sustain their marketing margins on these two regulated commodities.
So when we look at these two factors together next year we are going to see a significant jump in the earnings for companies like HPCL, BPCL and IOC largely driven by improved refining margins, sustainable marketing margins at the regulated products and sustainable inventory gains and stable rupee. When we put all these factors into consideration we have a buy on BPCL with a target price of Rs 1,000, HPCL with a target price of Rs 880 and IOC with a target price of Rs 475. This leaves almost 30-50 percent upside from the current levels due to recovery in the earnings.
Anuj: You were among the first to downgrade GAIL and that call has played out well. After the kind of underperformance we have seen do you think GAIL is still overvalued or do you think if it is taken out of subsidy net may be that could lead to a bit of minor re-rating? How would you be positioned on this one now?
A: As I said initially that government has not given any clarity on sharing mechanism so this quarter can be just an aberration where GAIL has been taken out of the sharing mechanism and whenever the earnings recover for GAIL, GAIL might be put back to the sharing mechanism again. We are not going to take a big call on the stock as of now but looking at fundamentals we continue to see that petrochemical prices are still declining, LPG prices are still at the lower end so these two commodities or these two segments constitute roughly 65 percent of the profitability of the company which is still under pressure. So we are going to see further de-rating in the stock from current levels.
Whatever positive is there that is just because of for the third quarter GAIL has been taken out of the sharing mechanism. However, we are not seeing any sustainable recovery in the two segments which are determining 65 percent of the profit of the company. Going forward as we have highlighted for Petronet LNG as well GAIL is having long-term contracted LNG from Petronet which is coming at the highest price of USD 13.50 -14 versus spot LNG prices of USD 7-8.
So they are facing a lot of challenge on that front that how to accommodate the higher price gas with the consumers. So last quarter also we have seen around Rs 95 crore loss in the marketing segment which might continue in the fourth quarter as well. So when we estimate earnings are likely to remain much weaker for GAIL in the fourth quarter and the years to come. Unless we see oil prices recovering back to USD 80-90 per barrel.
Ekta: Can you tell us about your call on Cairn India in a rising Brent crude scenario or what are you envisaging in terms of Brent Crude prices as well and your call on Reliance?
A: We have Brent price assumption of USD 60 for FY16 and USD 70 for FY17. If we see oil prices are near to that levels around USD 60 but if we look at the sustainability of oil prices at these levels look difficult looking at the global supplies. US supplies are still rising and in the summers we are going to see more supplies coming from US Shale Gas and hence oil prices are likely to remain under pressure between USD 50-60.
So now when we priced in USD 60-70 for Cairn India we get a target price of Rs 195 based on the assumption that they are going to cut back on the capex going forward which is going to challenge the production recovery or production growth from the current levels. For exploration & production (E&P) company’s two factors as we have said earlier are the most important one is the volume growth and the pricing. So both of them are under pressure and are likely to remain under pressure for next one and a half year to two years and hence we have a sell rating on the stock with a target price of Rs 195.
Coming to Reliance, we have a buy rating as I said that refining margins are recovering for the sector. Reliance’s 60-65 percent of the earnings is still derived from the refining segment. So in the quarter to come we are going to see an improved earning outlook for the company. We are going to see fourth quarter GRMs improving to between USD 9-10 in the coming quarter and hence we have a buy on the stock with a target price of Rs 1,045.
(Source: Moneycontrol.com, February 19, 2015)
DIESEL DEREGULATION: FULL BENEFIT TO OMCs BY FY17
Mumbai: The three oil marketing companies (OMCs), all government-owned — Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPC) and Hindustan Petroleum Corporation (HPC) — have already started reaping the benefits of diesel price deregulation.
In the December 2014 quarter, interest costs reduced between 26 per cent (IOC) to 61 per cent (BPC), year on year. Lower underrecoveries and full compensation by both the government and upstream companies towards subsidy (the loss on retailing of diesel below the cost price) also helped.
However, high inventory losses (due to a sharp fall in crude oil prices, totalling a combined Rs 17,000 crore,) along with foreign exchange losses, impacted profits of all the OMCs in the quarter. BPC was the only one of the three to report a net profit. HPC had a 81 per cent fall over a year before, to a net loss of Rs 325 crore. IOC’s net loss was Rs 3,069 crore, up 123 per cent over the year-ago period.
The bad news is likely to end here. “Weak crude will give the OMCs an opportunity to expand their marketing margins. With low competition risk, OMCs’ profits could expand substantially,” believe analysts at Axis Capital. The full benefits of diesel price deregulation are likely to kick in over FY16 and FY17. Analysts at Deutsche Bank expect gross underrecoveries of the OMCs to fall by 72-75 per cent by FY17 as compared to FY14. Lower oil prices and underrecoveries will lead to a further decline in interest costs. In this backdrop, most analysts remain bullish on all three.
While overall profitability will improve for IOC as interest costs and underrecoveries come down, divestment will remain a key overhang on the stock. Analysts believe, the company’s gross refining margins are likely to improve after commercialisation of its Paradip refinery, the most complex one in the state sector. At 1.1 times the FY16 estimated book, the stock trades at a 12 per cent discount to its historical average one-year forward price/book value ratio of 1.2 times.
HPC is highly levered to expanding marketing margins. Notably, every 50p/litre expansion in petrol/diesel margins could add 50 per cent to earnings per share, as against 20-25 per cent in the case of IOC and BPC, estimate analysts. In addition to the lower subsidy burden, HPC’s debt is likely to reduce further, as a large part of its refinery upgradation capex is over. The stock currently trades at 1.1 times the FY16 estimated book value, slightly higher than its historical average one-year forward price/book value ratio of about one.
Though BPC’s downstream business will benefit from oil reforms, the exploration and production (E&P) business could witness near-term softness, on the back of lower crude oil prices. However, an announcement around positive developments in the E&P business could act as a key catalyst for the stock. Analysts expect BPC’s return on equity to rise from 16.8 per cent in FY13 to 20 per cent in FY17, on the back of fuel price reforms. The stock, though, seems to have priced in most positives and is trading at 2.2 times the FY16 estimated book.
(Source: Business Standard February 19, 2015)
CRUDE OIL MAY FALL AGAIN IN NEAR-TERM, REBOUND TO $60 BY YEAR-END
Mumbai: Crude oil prices, which have come off sharply in the past few months, recently bounced a bit to around $61 a barrel (Brent crude). However, leading brokerages believe prices are going to rise by December 2016, though they could see some fall from current levels by the end of the current calendar year.
Bloomberg says the 2015 average crude oil target price of 10 leading global brokerages polled recently is $58.8 a barrel, four per cent lower than Wednesday’s $61. This is likely to rise to $74.6 a barrel in 2016 (see table). However, there are some sharp contrasting projections as well, with both sides having good justifications too. While some brokerages believe that oil prices could fall sharply, others feel it is an exaggeration.
“Talk of excess production is being overplayed. The world was only marginally oversupplied in 2014/15. As oil falls below $70 a barrel, higher cost producers will start to trim output. We believe demand will start responding to lower prices. China is already starting to fill its boots on lower prices,” write analysts at CLSA in a recent report.
Of the 10 analysts polled by Bloomberg, only four expect it to end 2015 at below $60 a barrel, with the rest factoring in $60-67. The lowest forecast is $51, a 16.8 per cent downside from current levels. The highest forecast of $66.9 is 9.1 per cent higher. Brokerages, though, are not ruling out further downsides in the short term.
“We remain cautious on near-term oil prices, given the excess supplies and tepid growth in demand. Any return of Libyan or Iranian oil would add further downward pressure on prices, with the prospect of declines below $40 a barrel,” believes Nic Brown of Natixis. For 2015, though, the brokerage expects crude to be $60 a barrel and move up to $74.5 in 2016.
Citigroup agreed with this, earlier in the month. “Oil production in the US is still rising. Brazil and Russia are pumping oil at record levels, and Saudi Arabia, Iraq and Iran have been fighting to maintain their market share by cutting prices to Asia. The market is oversupplied, and storage tanks are topping out. A pullback in production isn’t likely until the third quarter,” wrote Edward Morse, Citigroup’s global head of commodity research in a recent report, says Bloomberg news. He believes crude could fall to $20 in the short term. For 2015, though, he predicts $54 a barrel. Which of the sides is right, only time will tell.
Meanwhile, weak prices (below the $100 a barrel witnessed over recent years) are a big positive for India. Oil imports are a third of the country’s total import bill and weak crude prices would improve its current account and fiscal account deficits. Both retail and wholesale inflation could move lower by 20-50 basis points for every $10 a barrel fall in crude prices, estimate analysts.
Sector-wise, banking and financials will benefit significantly from lower prices, as lower inflation and improved liquidity could strengthen the case for rate cuts, which in turn can improve credit demand. Crude and crude derivatives form key inputs for fast moving consumer goods, tyre and paint companies, beside reflecting on other energy prices like coal. Among potential gainers could be Hindustan Unilever, Asian Paints, Apollo Tyres, MRF, Godrej Consumer and many more. A decline in crude prices could benefit such companies in the form of higher margins/higher demand if they pass the benefits to end-users.
The automobile sector will witness improved demand momentum, as lower fuel prices reduce the cost of owning and maintaining automobiles. The impact is mixed for oil and gas companies. While state-run upstream (Oil and Natural Gas Corp, Oil India) as well as downstream (Indian Oil, Bharat Petroleum, Hindustan Petroleum) companies will reap the benefits of lower underrecoveries and subsidy burden, the realisations of private upstream companies (Cairn India, Reliance Industries) will be hit due to lower crude prices.
(Source: Business Standard February 19, 2015)
STRANDED PLANTS SEE LIFELINE IN GAS SWAP
Hyderabad: Stranded gas-based power plants of Lanco Infratech, GVK Power, GMR and others expect an early nod for gas swap mechanism as well as gas pooling, which will enable them to fire up some of the idle capacity.
A decision on this is likely to be taken within a few days and an initial capacity of 450 MW will be operational.
This would provide partial relief to the power-starved Telangana and augment supplies to Andhra Pradesh.
While the Union Power Ministry and the Finance Ministry are finalising the overall mechanism to facilitate ‘gas pooling’ and also working out the financial implications, the initial arrangement of gas swap is in the final stage.
This is likely to be approved shortly enabling companies to run some of the idle capacity, T Adi Babu, Chief Operating Officer of Lanco Infratech, told BusinessLine .
It is proposed to supply gas by swapping with fertiliser companies located in Gujarat.
As per the arrangement, while fertiliser units would get gas from other sources and possibly use RLNG, the gas produced in the eastern region would be supplied to stranded power plants. About 450 MW is proposed to get operational by late this month or in March first week, Adi Babu explained.
This arrangement may be near-term to cover summer months, but depending upon what the government wants, this may continue to for some more time, he explained.
Isaac A George, Chief Financial Officer of GVK group, said, “We are all hoping that the gas pooling mechanism, which has been pending for some time, gets an early nod so that it would benefit stranded projectsthat have been losing money, and consumers, who will get more power.”
The government is planning to swap gas, as such a move shall not require transport of gas from the east to west coast and vice versa. Also, the gas can be consumed locally by fertiliser units in Gujarat and power plants in AP.
The other longer term arrangement that is being worked out relates to gas pooling, which is at the approval stage.
Meanwhile, the power-deficit State of Telangana is keen to tap into power generated from gas plants. Therefore, with the naptha prices also coming down with other fuels, proposals are under consideration to generate power using naphtha from plants, which can use this as fuel.
At current prices it works out to about Rs. 6.5 to Rs. 7 per unit, close to the sale price for some commercial and industrial consumers, George explained. To facilitate this, arrangements are being finalised.
(Source: Business Line February 19, 2015)
KG BASIN GAS SUPPLY: SMEs AWAIT COMPLETION OF CRUCIAL PIPELINE
Hyderabad: Small and medium scale enterprises which use natural gas from independent wells in the Krishna-Godavari basin area have asked for the pipeline link to be completed and their contracts renewed.
A 42-km pipeline, which would be a lifeline to over 20-30 companies engaged in manufacture of ceramic tiles, tableware, steel pencil ingots and cold storage chains among others has been unfinished because a 400-metre stretch needs to be linked up.
This completion of this small stretch has been pending for more than 18 months.
Krishna-Godavari Basin Isolated Wells Consumers Association (KGIWCA), which held a meeting of all consumers who rely on gas supplied from KG Basin’s isolated fields, has requested the Union Ministry of Petroleum and Natural Gas, State government and main suppliers ONGC and GAIL to ensure they get adequate supply of gas.
These isolated gas fields are located in Lingla-Kaikalur, Malleswaram, Antarvedi, Penugonda in Krishna, East and West Godavari districts.
The gas produced from these fields is mostly associated gas, an offshoot of oil producing wells. It serves as a source of additional revenue to the producer.
Commenting on the importance of the SME sector, Sharath Joseph Gummandi, Vice-President, Sentini Ceramics, said: “More than Rs. 2,200 crore has been invested in these companies which employ about 15,000 people. There is a need to ensure steady supply (of gas) and to the contracts. Use of any other gas makes these companies financially unviable.”
Explaining the fuel supply arrangements, which these companies entered into with ONGC and GAIL, he said contracts range from two-to-five years and are revived based on availability of gas.
Most of these industries are categorised as small consumers by the Centre with gas allocation of 50,000 scmd. The total gas allocation to these industries is about 3,30,000 scmd.
Gas supply to Steel Exchange India and Vijai Bhavani Power has been stopped and new contracts are underway.
Both these units are facing tough times. Ever since the pipeline blowout in East Godavari, ONGC is flaring up 70,000 scmd. Before the blow out, it was pumping the gas into the grid, the association said.
Therefore, the association has made an appeal to ensure fuel supplies to these units, stating that such small industries play a major role in bringing about socio-economic development.
(Source: Business Line February 19, 2015)
RGPPL WANTS TO HIKE AUTHORISED SHARE CAPITAL TO STAY AFLOAT
Mumbai: Ratnagri Gas and Power Private Limited, struggling to restore Dabhol power generation, plans to increase its authorised share capital to Rs 4,000 crore from Rs 3,500 crore to stay afloat and thereby avoid turning the project into non-performing asset (NPA). This is necessitated to further convert the debt of Rs 343 crore into equity. The 1,967-Mw project has been closed since December 28,2013 for want of gas.
RGPPL’s move comes close on the heels of Maharashtra State Electricity Distribution Company Ltd (MahaVitaran)’s decision to terminate power purchase agreement (PPA) through its letter despatched on January 12 to RGPPL. This apart, RGPPL’s proposal to increase its authorised share capital is subsequent to conversion of debt of Rs 405 crore into equity resulting it increase in the total paid up share capital to Rs 3,370 crore from 2,964.90 crore. RGPPL board gave its consent at its meeting held in early December in which MahaVitaran had strongly opposed the conversion of debt into equity citing that it would lead to increase in the per unit tariff to Rs 5.50 and it won’t be in a position to procure power from the project.
RGPPL official told Business Standard: ”Lenders to the Dabhol project are insisting that the RGPPL pays dues worth Rs 500 crore during July 2014 and January 2015. Besides, lenders are pressing for further conversion of debt into equity to avoid NPA.
However, RGPPL has expressed its inability to further convert debt into equity, as the margin between the authorised share capital and the equity is just Rs 130 crore. However, the proposed conversion of additional debt of Rs 343 crore into equity will be possible only after RGPPL increases its authorised share capital to Rs 4,000 crore. The board will soon take a call in this regard.
The official said RGPPL has incurred financial and generation loss due to the closure of the project. RGPPL’s financial loss was Rs 1,486 crore in 2013-14 compared with Rs 375 crore in 2012-13, while the generation loss was 14,000 million units.
The official said the present share holding after the conversion of Rs 405 crore into equity include NTPC 28.91 per cent (earlier 32.86 per cent), GAIL India 28.91 per cent (32.86 per cent), IDBI Ltd 9.94 per cent (6.34 per cent), ICICI Bank Ltd 6.64 per cent (4.25 per cent), State Bank of India 7.95 per cent (5.16 per cent), Canara Bank 1.70 per cent (1.11 per cent), IFCI Ltd 0.62 per cent, MSEB Holding 15.32 per cent (17.41 per cent).
A MahaVitaran official said conversion of debt into equity is a temporary solution. “The project can be revived only after assured gas of 8.5 million metric standard cubic metre per day is restored by the Centre. The conversion of additional debt into equity will lead to rise in per unit tariff and for that a regulatory approval is required,” the official said, and added that MahaVitaran has already terminated its PPA with PPA with RGPPL. Therefore, the ball is now in the Centre’s court to take corrective measures.
(Source: Business Standard February 19, 2015)
CHEAPER CRUDE OIL SUBDUES US PRODUCER INFLATION; HOUSING STARTS FALL
Washington: US producer prices recorded their biggest decline in more than five years in January on plunging energy costs, pointing to very benign inflation in the near term that could argue against raising interest rates.
Other reports on Wednesday suggested the economy was growing moderately early in the first quarter. Housing starts fell last month, while manufacturing output edged higher.
“The reports paint a disappointing picture on the US recovery, with the housing starts report in particular reinforcing the narrative that the housing recovery might be in a spot of bother, said Millan Mulraine, deputy chief economist at TD Securities in New York.
The Labor Department said its producer price index for final demand fell 0.8 per cent, the biggest drop since the revamped series started in November 2009, after dipping 0.2 per cent in December. It was the third straight month of decline in the PPI.
In the 12 months through January, producer prices were unchanged, the weakest year-on-year reading since records started in November 2010, after rising 1.1 per cent in December.
Economists had forecast the PPI declining only 0.4 per cent last month and gaining 0.3 per cent from a year ago.
US Treasury debt prices extended gains on the data. The dollar maintained gains versus a basket of currencies. Lower energy prices, against the backdrop of softer global demand and increased shale production in the United States, and a strengthening dollar are dampening domestic inflation pressures.
While the Federal Reserve, which has a 2 per cent inflation target, views the tame price environment as transitory, signs that the energy-driven weakness is leaking to core inflation could cause discomfort among some policymakers.
A key measure of underlying producer price pressures, which excludes food, energy and trade services, fell a record 0.3 per cent last month after edging up 0.1 per cent in December.
US manufacturing output rose a modest 0.2 per cent in January and was flat in December, the Fed said in a separate report.
The Commerce Department said housing starts fell 2.0 per cent to a seasonally adjusted annual pace of 1.07 million units in January.
Most economists expect the US central bank to start raising interest rates in June, citing rapidly tightening labour market conditions. The Fed has kept its short-term interest rate near zero since December 2008.
The US economy still faces headwinds created by a stronger dollar and weaker overseas markets, which weigh on exporters.
Wholesale energy prices tumbled a record 10.3 per cent in January after sliding 6.2 per cent in December. It was the seventh straight month of declines.
Food prices fell 1.1 per cent, the largest decline since April 2013, after falling 0.1 per cent the prior month. The volatile trade services component, which mostly reflects profit margins, rose 0.5 per cent following a similar gain in December.
Despite the decline, which was driven by a fall in groundbreaking for single-family projects, starts remained above the one million-unit mark for a fifth straight month. Compared to January last year, groundbreaking was up 18.7 per cent.
Sluggish wage growth and a shortage of homes on the market stymied housing last year, even as the broader economy was accelerating.
But a turnaround in housing is expected this year as a rapidly tightening labor market pushes up wages and encourages more young adults to move out of their parents’ basements and set up their own homes.
Already in the fourth quarter, household formation was accelerating, breaking above the one-million mark that usually is associated with a fairly healthy housing market. Although much of the gain in households went into rentals, that would still be a boost to housing starts this year.
Homebuilders such as DR Horton, Lennar Corp and Pulte Group are likely to benefit from the anticipated pick-up in starts this year.
In January, permits for future home construction dipped 0.7 percent to a 1.05 million-unit pace. Permits have been above a 1 million-unit pace since July.
Single-family permits fell 3.1 percent last month, while multi-family permits rebounded 3.6 percent.
(Source: Business Standard February 19, 2015)
BUFFETT ENDS $3.7 BILLION EXXON INVESTMENT AMID GLOBAL OIL ROUT
Seattle/New York: Warren Buffett’s Berkshire Hathaway Inc. exited a $3.7 billion investment in Exxon Mobil Corp. amid a slump in oil prices.
Crude has fallen by about half since June as US production surged and the Organization of Petroleum Exporting Countries (Opec) resisted output cuts. The decline has ravaged oil company profits and forced major producers and drillers to slash spending and fire thousands of workers.
Berkshire has “not really had the hot hand in energy,” Fadel Gheit, an analyst for Oppenheimer & Co. in New York, said in a phone interview. “The whole energy sector obviously is now traded in completely different circumstances than they were only a year ago.”
Buffett built Berkshire into the fourth-biggest company in the world through acquisitions and by picking stocks that surged in value like Coca-Cola Co. and the former Washington Post Co. Still, he’s had a mixed record when it comes to investing in energy companies.
One of his biggest winners was PetroChina Co. In 2007, he booked a $3.5 billion profit after selling an investment in the oil producer of about $500 million. That was followed by an ill- timed bet on ConocoPhillips stock before crude prices peaked in 2008, and a $2 billion bond investment in Energy Future Holdings Corp. that was later written down as natural gas prices plunged.
Berkshire’s 41.1 million shares of Exxon cost on average $90.86 apiece in 2013, according to the latest annual report. A regulatory filing Tuesday showed Buffett sold the holding during the fourth quarter. The oil company traded for an average of $93.27 in those three months, so Berkshire could have sold the stake at a profit. Scott Silvestri, a spokesman for Exxon, declined to comment.
Buffett also eliminated a smaller holding in ConocoPhillips while adding to a bet on Canadian synthetic crude oil producer Suncor Energy Inc. and oil refiner Phillips 66, according to the filing, which detailed the US stock portfolio at Buffett’s company as of 31 December.
The changes show that that there are differing views about energy stocks at Berkshire, said Jeff Matthews, a shareholder and author of books about the company. Buffett, 84, has been handing more funds to his back-up stock pickers, Todd Combs and Ted Weschler, as part of his succession plan. The billionaire Berkshire chairman and chief executive officer has said the biggest holdings in the portfolio tend to be his.
“There was clearly no edict that says, ‘Oil is terrible, let’s get out,’” Matthews said in a phone interview. “Someone has a different opinion about it.”
Buffett affirmed his support for one of his biggest holdings, International Business Machines Corp., in the fourth quarter, by adding 6.5 million shares. The stake is now worth about $12.4 billion. Buffett didn’t respond to a request for comment sent to an assistant.
Last year, the computer-services company fell below the price Buffett paid for most of the stake after abandoning an earnings forecast. CEO Ginni Rometty is trying to reignite growth at IBM by expanding sales for newer cloud computing and data analytics offerings.
Berkshire also increased its investment in agricultural equipment maker Deere & Co. and disclosed a stake in Rupert Murdoch’s 21st Century Fox Inc. valued at more than $160 million based on Tuesday’s closing price.
Buffett has said he’s focused on buying whole businesses and expanding them over time. Berkshire now derives a majority of its profit from operating subsidiaries, including railroad BNSF, electric utilities and manufacturing operations. That’s a reversal from two decades ago when most profit came from insurance units.
Investors have cheered the shift even as some of Buffett’s stock picks faltered. Berkshire shares rallied 27% in 2014 to near-record levels.
“Last year really shows” how the stock portfolio has become less important, said Cliff Gallant, an analyst at Nomura Holdings Inc. “It wasn’t a stellar year for the portfolio, but it was a good year for the company.”
(Source: Mint February 19, 2015)