Petronet LNG: Testing times ahead

Domestic R-LNG supplier Petronet's bottom-line is under pressure, with bulk users switching to naphtha in the wake of the recent tumble in the international crude oil prices 

Noor Mohammad, Hardnews

It was just a few months ago that imported liquefied natural gas (LNG) used to be a favoured fuel choice for bulk consumers in sectors such as power, fertilizers, petrochemicals and steel using costly naphtha as fuel or feedstock. However, thanks to the precipitous fall in international crude oil prices in recent months, naphtha has overtaken imported LNG to re-emerge as the first fuel choice, upsetting calculations of key suppliers of regasified LNG (R-LNG) in the Indian market such as Petronet LNG.

With its margin under pressure, Petronet's net profit during the third quarter of the current financial year (Oct-Dec 2008) slipped 20 per cent. The company's net profit for the latest quarter was pegged at Rs 105 crore, as against the Rs 131 crore reported by it for the corresponding period of the previous fiscal.

Significantly, Petronet was on a roll in recent years as the domestic R-LNG market was virtually a seller's market due to its limited supply and high demand. R-LNG was looked upon favourably by bulk users as naphtha had become a costlier option due to surging crude oil prices. But now things are getting difficult for Petronet, with bulk users switching back to naphtha in the wake of the recent tumble in the international crude oil prices.

There is little possibility of a rebound in the global crude oil market anytime soon. And with Petronet's fortunes tied with crude prices, maintaining profitability might prove a big challenge for the company's management. Buoyed by the prospect of a dramatic turnaround in the domestic availability of natural gas following recent discoveries of world-class gas discoveries by Reliance Industries Ltd, Gujarat State Petroleum Corporation and ONGC in the prolific Krishna-Godavari basin (KG), the government had directed fertilizer units to switch over from costly naphtha to natural gas. These plants have been given time till March 2010 to comply with the government's directive.

The government had issued the directive in a bid to slash its fertilizer subsidy bill, which was rising sharply because of the high input costs in the wake of the surge in the international crude oil market.

However, the government seems to be relenting on this in view of the changed fuel market scenario.

In a sign of the government's new thinking on this matter, the Empowered Group of Ministers (EGOM) constituted by the Prime Minister's Office (PMO) to decide on gas utilisation policy has asked the Department of Fertilizers (DoF) to review the comparative cost economics of using naphtha as feedstock in fertilizer production. This is to explore the possibility if some of the naphtha-based fertilizer plants in the public sector can be allowed to continue with naphtha usage to take advantage of the changed fuel market scenario. Most of the power plants have already shifted from R-LNG to naphtha.