Ambani Gas Set to Revive Stalled Power Projects: Corporate India

India is considering a plan to divert natural gas supplies from Mukesh Ambani’s field to revive $21 billion of power projects stalled by the lack of fuel.

A panel of ministers scheduled to meet today will discuss diverting gas away from fertilizer makers to electricity plants, Oil Minister Veerappa Moily told reporters yesterday. More than 8,000 megawatts of new capacity is lying idle because of the shortage caused by dwindling output, according to the Association of Power Producers.

A decline in India’s natural gas production for 29 consecutive months has hurt generators, oil refineries and steel mills, while slowing the pace of economic growth to a decade low. Prime Minister Manmohan Singh, struggling to provide electricity to all the 1.2 billion people, must reorder priorities and place emphasis on power production to spur the $1.9 trillion economy, said Alex Mathews, head of research at Geojit BNP Paribas Financial Services Ltd.

“The biggest challenge for the government right now is to keep the lights on,” Mathews said by telephone from the southern Indian city of Kochi. “The power companies are struggling because of the shortage and returns are pretty low. It’s a sector investors are keeping away from.”

Gas Priorities

The government currently prioritizes gas supplies to fertilizer makers, followed by liquefied petroleum gas extractors and power generators. India had 20,359 megawatts of gas-based electricity generating capacity, or 9 percent of the total, as of May 31, according to data provided by the Central Electricity Authority.

Companies including GVK Power & Infrastructure Ltd., controlled by billionaire G.V. Krishna Reddy, to Lanco Infratech Ltd. and state-owned NTPC Ltd. may get about 9 million cubic meters a day of gas from Reliance Industries Ltd.’s field, an oil ministry official said yesterday, asking not to be identified before any public announcement.

Billionaire Ambani’s Reliance-operated KG-D6 field off India’s east coast in the Bay of Bengal has seen a three-year decline in gas production, with output dropping more than 75 percent in the past three years. Reliance says the field has proved more difficult to produce from than initially envisioned, with higher costs for deeper areas.

Pricing Formula

Last month, the government allowed explorers to charge a higher price for gas for the first time in three years to help increase production. It approved a gas pricing formula that will increase prices more than 90 percent to about $8 per million British thermal units.

The higher price, starting April 1, will make an additional 3 trillion cubic feet, equivalent to a year and half of the country’s consumption, economically viable to produce, according to Moily.

Gas shortages have contributed to GVK Power’s operating margins, or profit from operations as a percentage to total revenue, narrowing to 11.27 percent in the year ended March 31, the lowest in at least eight years. Return on assets, a measure of profitability relative to total assets, at Reliance Power Ltd., which is controlled by Ambani’s younger brother Anil, dropped to 2.22 percent, the least in four years.

Share Slump

Shares of 19 of the 20 companies in the S&P BSE India Power index have declined this year. The gauge has dropped 16 percent in 2013, compared with a 2.6 percent gain in the benchmark S&P BSE Sensex index.

GVK Power rose as much as 2.8 percent to 7.35 rupees and traded at 7.11 rupees as of 12:58 p.m. in Mumbai. Reliance Power gained as much as 4.7 percent to 81.95 rupees and NTPC rose as much as 2 percent to 146.10 rupees.

Allocating the additional gas “is only half the solution,” said Ashok Khurana, director general of the Association of Power Producers, which counts Tata Power Ltd., Reliance Power and Adani Power Ltd. as members. “We have also asked the petroleum ministry to reserve the future finds for the power sector.”

Earmarking 9 million cubic meters a day of gas will help generate about 2,500 megawatts of power, he said.

NTPC, the nation’s biggest generator, expects to get as much as 40 percent of the new allocation, which will help it operate its gas-based stations at an average 55 percent of capacity versus 49 percent now, operations director N.N. Misra said in a telephone interview yesterday. The company has 3,955 megawatts of gas-based generation capacity, according to its website.

Factory Output

Lower power production contributed to India’s industrial output unexpectedly contracting in May. Production at factories, utilities and mines declined 1.6 percent from a year earlier, the worst performance in a year, Central Statistical Office data showed on July 12.

A shortfall in coal supplies is also adding to the woes of power generators. Lack of transport infrastructure, labor unrest and delays in environment approvals and land acquisitions have kept the nation’s coal output below demand, forcing users to go for more expensive overseas purchases.

Asia’s biggest energy consumer after China plans to add 88,537 megawatt of power generation capacity in the five years to March 2017, 81 percent of which will be run on coal or gas, according to the Central Electricity Authority.

Fertilizer makers and power stations use more than three fourths of the gas available in India. The crop nutrients are given to farmers at subsidized prices to keep food prices down. Diverting gas from fertilizer users will force the nation to increase imports of the nutrients by as much as 5 million tons a year, the oil ministry official said.

“The new allocation is a beginning in the right direction, but certainly not enough for the power sector,” said Debasish Mishra, a partner and head of the energy practice at Deloitte Touche Tohmatsu India Pvt. in Mumbai. “It’s a tightrope walk for the government, as sharing the gas with power sector would mean the government’s fertilizer subsidy will go up.”

Before it's here, it's on the Bloomberg Terminal.