Lowest U.S. Gas Price Since 1999 Attracts GAIL: Corporate India

GAIL India Ltd. (GAIL), the first Asian company to buy liquefied natural gas from the U.S., plans to take advantage of the lowest prices in 13 years to boost imports from America and revive sales growth at home.

India’s biggest natural gas distributor is in talks with U.S. exporters to make up for falling production at domestic fields, P.K. Jain, finance director at GAIL, said in a phone interview yesterday. The company aims to meet demand in Asia’s third-biggest economy through overseas purchases, he said.

“We’re in discussions with various companies for long-term contracts because there will be demand in India and domestic output volumes are limited,” Jain said. “We’re looking to get LNG from the U.S. because prices there are cheap. And its affordable enough to transport it all the way to India.”

GAIL needs to boost sales and revive net income growth that almost stalled in the year ended March 31 after earnings from transporting gas slumped, said Alok Deshpande, a Mumbai-based analyst with Elara Securities Ltd. An 81 percent plunge in U.S. gas prices from a record high touched in 2005 may help the company bolster sales in India, Jain said.

Energy demand in India is forecast to more than double by 2035 to 49.2 quadrillion British thermal units from 21.1 quadrillion Btu in 2008, according to the U.S. Energy Information Administration. The share of gas in India’s power generation mix will expand from 11 percent in 2008 to 16 percent in 2035, according to the EIA.

GAIL rose 2.9 percent to 388 rupees at the close in Mumbai today, making it the biggest gainer on the BSE India Oil & Gas Index. The benchmark Sensitive Index (SENSEX) fell 0.3 percent. The shares have dropped 8.4 percent in the past year, compared with a 9.2 percent advance in the Sensex.

Gas Production

The company transported an average 110 million cubic meters of gas a day in the quarter ended June 30, less than the 117 million cubic meters a day in the year ended March 31, Jain said. Production of the fuel from fields in India fell for the 19th consecutive month in June, dropping 11.1 percent, compared with a year earlier to 3.53 billion cubic meters, according to oil ministry data.

“The biggest trigger for GAIL is the gas volumes they transport, which have been falling,” Deshpande said. “Current imports will not help make up the entire volume of lower domestic supply, and they need to get more contracts.”

The lack of supply is forcing the company and Petronet LNG Ltd. (PLNG), in which GAIL has a 12.5 percent stake, to buy a larger volume of gas from overseas and increase capacity and terminals used to import the fuel.

Sabine Pass

In December, GAIL agreed to buy 3.5 million tons of LNG a year for two decades from Houston-based Cheniere Energy Partners LP (CQP)’s Sabine Pass terminal in western Cameron Parish, Louisiana. The terminal is the only one with approval to export the fuel to nations that don’t have a free-trade agreement with the U.S. The New Delhi-based company followed that deal with a supply agreement with France’s GDF Suez SA in August and a three-year contract to purchase the fuel from Barcelona-based Gas Natural Fenosa earlier this month.

The contracts, which start as early as January next year, will increase GAIL’s transportation volumes to about 116 million cubic meters a day in the year ending March 31 and as much as 121 million cubic meters a day next year, Ballabh Modani and Nitin Tiwari, Mumbai-based analysts with Religare Institutional Research, wrote in a Sept. 3 report.

Natural gas prices in New York trading, a benchmark used to set U.S. LNG prices, have averaged $2.57 per million Btu this year, the lowest since 1999. Prices reached a record high of $15.378 per million Btu in December 2005.

Shale Gas Output

Prices fell 2.7 percent to $2.87 per million Btu in New York trading yesterday. Rates may rise to $3.45 per million Btu by June 2013 and $3.95 per million Btu by the end of next year, according to a median estimate of 14 analysts surveyed by Bloomberg.

A surge in shale gas output in the U.S. has driven down prices in the U.S. and prompted companies to convert LNG import facilities for export. Companies including BG Group Plc (BG/), Korea Gas Corp. and Gas Natural have also tied up to buy LNG from Cheniere’s terminal.

Cheniere is using Henry Hub, the main U.S. gas benchmark traded on the New York Mercantile Exchange, as the pricing index, while Australia’s Gorgon project is using oil to set the price for the 1.5 million tons a year to be shipped to Petronet.

U.S. exports to Asia would cost $9.45 per million Btu, based on a benchmark Henry Hub price of $3, according to a Sept. 11 presentation on Cheniere’s website. Japan, the biggest LNG importer, paid an average of $18.07 per million Btu in July, up 4.5 percent from June, according to the country’s finance ministry data.

Eagle Ford

GAIL has set aside $1 billion for shale-gas acquisitions and is looking at assets in the U.S. and Canada, Chairman B.C. Tripathi said on Nov. 2. The company bought a 20 percent stake in shale areas of the Eagle Ford region in Texas from Carizzo Oil & Gas Inc. for $95 million in September.

GAIL is in talks to buy gas from Freeport LNG Development LP’s proposed plant in the U.S., a person with direct knowledge of the matter said Jan. 16. Finance Director Jain declined to comment on the deal.

The gas distributor plans to start an LNG import terminal at Dabhol in India’s west coast by November, when the monsoon season ends and tankers can come in to the port to offload the fuel, Jain said. The terminal will have the capacity to import 5 million metric tons a year and will initially operate at half that rate, he said.

Floating Terminal

The company also plans to build a floating LNG storage terminal off India’s east coast with GDF Suez, according to an April 17 statement. Petronet LNG and Indian Oil Corp. (IOCL) are also building new terminals and expanding older ones.

“Right now there’s a capacity shortage, and once our Dabhol terminal starts, we’ll announce more contracts,” Jain said. “We need to compensate for the drop in domestic volumes.”

GAIL’s net income rose 2.6 percent to 36.54 billion rupees ($678 million) in the year ended March 31, the slowest increase since the 12 months ended March 31, 2000. Sales rose 24 percent to 402.8 billion rupees, lower than the 37 percent increase the previous year.

“Concerns on gas volumes have been dragging GAIL’s stock down,” said Sujit Lodha, a Mumbai-based analyst with Asian Markets Securities Pvt. in Mumbai. “Reasonably priced LNG imports will be the driver and help boost the stock.”

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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