GAIL may get Rs 400-cr boost after hike in KG pipeline tariff

Public sector gas marketing firm GAIL (India) could see its top line getting a boost of nearly Rs 406 crore

after the downstream regulator Petroleum and Natural Gas Regulatory Board (PNGRB) has hiked the

tariff for its KG-basin pipeline from Rs 5.56/mbtu to Rs 45.3/mbtu, a sharp increase of 715%.

However, the caveat is that the regulator is considering the economic life only till February 2017. The

new tariff is effectively valid for less than a year – April 1, 2016 till February 11, 2017.

The rise in tariff could translate to profit after tax of around Rs 272.4 crore, said analysts. Even though

KG network is one of the smaller networks of the government-run company, and accounts for less than

5% volume, this large hike itself can raise GAIL’s FY17 earnings by over 3%. Importantly, investor

confidence would increase and forthcoming tariff orders will also lead to tariff hikes, analysts say.

Although, after the steep hike in tariff, the end-consumers in KG-basin network are also likely to

challenge the order. The tariff order indicates that while consumers had initially not participated in

earlier three open houses in 2015, they had participated in the most recent open house in February

2016. In their submissions, key consumers have opposed issues (particularly economic life), which could

raise tariff.

Nomura in a March 17 report said that the tariff increase for the network is very high. “Also, we

highlight that several power sector consumers in KG-basin also use some imported LNG on swapping

basis. For this swapped gas, apart from KG basin, customers also end up paying tariff for other networks

on contract path and also taxes and duties. After such a steep hike, the tariff for such swapped LNG may

become exorbitantly high,” the global markets research firm said in its note.

Assumption of such low economic life does not seem logical, says industry watchers, as GAIL has done

significant capital expenditure in this network in last few years, and has replaced several key sections of

pipelines. GAIL has substantially upgraded its network, and certainly extended the economic life for this

network by many years. However, as the current tariff calculation methodology is rigid, the economic

life of 25 years from network beginning, February 1992, has been considered.

NGS INDIA