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JUL 25th 2011

ENERGY SECTOR (NATURAL GAS) LONG TERM BUY

Natural Gas
Natural Gas seems to be reaching its golden era where the demand of the fuel growing globally with a rate of 7.4%. The gas demand is increasing on global concerns over eco-friendly healthy environment and increasing huge energy requirements. The companies who are into business of logistics of natural gas seems to flourish in the coming years. 2012 to 2025 can be referred as the Golden era for natural gas. Concerns over Nuclear power safety Japans Fukushima Nuclear crisis has raised concerned towards generating power using nuclear fuel across the world. For instance, Germany has decided to shut down all its reactors by 2022. German government ordered the country's seven oldest reactors, built before 1980, shut down four days after the Fukushima incident. The plants, which will now remain offline, accounted for about 40 per cent of the country's nuclear power capacity. Rest would be shut down by the year 2022. Such shutting down of nuclear reactors would certainly create a huge demand of another fuel to be used for power generation which is safer and abundant. Natural gas is the best option among all.

Key Highlights
# Concerns over Nuclear power safety # Increasing eco-friendliness # Cheaper energy resource # Great future ahead for suppliers and intermediaries

E Q U I T Y R E S E A R C H R E P O R T

Increasing Eco-friendly trend There are growing concerns over carbon dioxide and other poisonous gases emissions due to thermal power generation, transports, and other industrial operations. Thus, nations are seeking reliable, clean and affordable energy resources. Also, with the changing lifestyle, people are becoming very much concerned about their health and clean environment. Natural gas is the cleanest of all the fossil fuels, as evidenced in the Environmental Protection Agencys data comparisons in the chart below, which is still current as of 2010. Composed primarily of methane, the main products of the combustion of natural gas are carbon dioxide and water vapor, the same compounds we exhale when we breathe. Coal and oil are composed of much more complex molecules with a higher carbon ratio and higher nitrogen and sulfur contents.

Source: EIA

Global energy demand has increased by 5.6% in 2010 (source EIA) and the natural gas consumption has increased by 7.4%.
Fossil Fuel Emission Levels - Pounds per Billion British Thermal unit of Energy Input Pollutant Natural Gas 117,000 40 92 1 7 0.000 Oil 164,000 33 448 1,122 84 0.007 Coal 208,000 208 457 2,591 2,744 0.016

Carbon Dioxide Carbon Monoxide Nitrogen Oxides Sulfur Dioxide Particulates Mercury

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Oil and coal prices are at higher end to the natural gas The prices of crude oil and coal have increased with a great pace in the recent past compared to the price of natural gas. This gives an extra advantage to the natural gas in term of growing demand. Presently, the crude oil is priced at around $97 per barrel (approximately $16.71 per million Btu) while the natural gas is only priced at $4.4 per million Btu. The natural gas price growth shows a flat trend over last three years while crude prices are growing at much higher rate of 55.66% CAGR. With the growing demand, the price of natural gas is also expected to increase but it would be still much lower than the crude.

E Q U I T Y R E S E A R C H R E P O R T

Great future ahead for suppliers and other intermediaries The whopping gap between demand and supply of natural gas in future suggests that the imports of the natural gas will increase which will induce rapid growth of natural gas suppliers and other distributors, such as Petronet, GAIL, IGL, GSPL etc rather than the producers. The companies such as Petronet LNG Ltd, GAIL, Indraprasth Gas (IGL) etc would see a brighter future ahead, with increasing capacity of LNG terminals as well as their numbers in India . Natural Gas demand and supply estimates of India
Source: Petronet Ltd, May 2011

The details of the companies are discussed in the later section of the report.

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Natural Gas
Natural gas has emerged as the most preferred fuel due to its inherent environmentally benign nature, greater efficiency and cost effectiveness. The demand of natural gas has sharply increased in the last two decades at the global level. In India too, the natural gas sector has gained importance, particularly over the last decade, and is being termed as the Fuel of the 21st Century. Natural gas is a gas consisting primarily of methane, typically with 020% higher hydrocarbons (primarily ethane). It is found associated with other hydrocarbon fuel, in coal beds, as methane clathrates, and is an important fuel source and a major feedstock for fertilizers. Creation: There are two mechanisms of creating natural gas: 1. 2. Biogenic: Created by methanogenic organisms in the marshes, bogs, landfills and shallow sediments Thermogenic: The gas is created from deep buried organic material at a very high temperature and pressure.

E Q U I T Y R E S E A R C H R E P O R T

Processing: Before natural gas can be used as a fuel, it must undergo processing to remove almost all materials other than methane. The by-products of that processing include ethane, propane, butanes, pentanes, and higher molecular weight hydrocarbons, elemental sulfur, carbon dioxide, water vapor, and sometimes helium and nitrogen.

The block flow diagram also shows how processing of the raw natural gas yields byproduct sulfur, byproduct ethane, and natural gas liquids (NGL) propane, butanes and natural gasoline (denoted as pentanes +).

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Usage: The natural gas can be used in wide variety of ways. Some are listed below: 1. Power generation: Natural gas is a major source of electricity generation through the use of gas turbines and steam turbines. Domestic use: cooking, cloth-dryers, heating/cooling and central heating Transportation: Natural gas is used as fuel in automobiles similar to gasoline, in the form of CNG (compress natural gas). Fertilizers: Natural gas is a major feedstock for the production of ammonia, via the Haber process, for use in fertilizer production. Aviation: The liquid methane has more specific energy than the standard kerosene mixes do. An LNGpowered aircraft would cost 5,000 roubles (~ $218/ 112) less to operate per ton, roughly equivalent to 60%, with considerable reductions to carbon monoxide, hydrocarbon and nitrogen oxide emissions, claimed by a Russian aircraft manufacturer. Hydrogen: Natural gas can be used to produce hydrogen, with one common method being the hydrogen reformer. Other: Natural gas is also used in the manufacture of fabrics, glass, steel, plastics, paint, and other products.

2. 3.

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E Q U I T Y R E S E A R C H R E P O R T

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Types: LNG: LNG is a clear, colorless, non-toxic liquid that can be transported and stored more easily than natural gas because it occupies up to 600 times less space. When LNG reaches its destination, it is returned to a gas at re-gasification facilities. It is then piped to homes, businesses and industries. CNG: Compressed Natural Gas, or CNG, is quite simply gas that has been compressed such that it can be transported in pressure vessels rather than by pipeline as is the traditional method. CNG is generally used to fuel transit and fleet vehicles in large cities, as well as in a limited number of personal Natural Gas Vehicles. Storage and Transport: The natural gas has very low density. Thus, it is not easy to store and transport by vehicle. Gas is turned into liquid at a liquefaction plant, and is returned to gas form at re-gasification plant at the terminal. LNG is the preferred form for long distance, high volume transportation of natural gas, whereas pipeline is preferred for transport for distances up to 4,000 km over land and approximately half that distance offshore. CNG is transported at high pressure, typically above 200 bars. Compressors and decompression equipment are less capital intensive and may be economical in smaller unit sizes than liquefaction/re-gasification plants. Natural gas trucks and carriers may transport natural gas directly to end-users, or to distribution points such as pipelines.

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E Q U I T Y
Floating Liquefied Natural Gas (FLNG) is an innovative technology designed to enable the development of offshore gas resources that would otherwise remain untapped because due to environmental or economic factors it is nonviable to develop them via a land-based LNG operation. Measurement and Pricing: Quantity: Quantities of natural gas are measured in normal cubic meters (corresponding to 0 C at 101.325 Kilo Pascal) or in standard cubic feet (corresponding to 60 F (16 C) and 14.73 pounds per square inch) Pricing: The price of natural gas varies greatly depending on location and type of consumer. The gas is priced as currency per cubic feet or per British thermal unit (Btu).

R E S E A R C H R E P O R T

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Indian Scenario
India has around 38 trillion cubic feet of proven natural gas reserves as of January 2011 (source EIA). The majority of resources lie in Krishna Godavari basin, Gujarat, Assam and some other parts of India. The Krishna Godavari Basin has around 20 trillion cubic feet of natural gas reserve. The production of the natural gas in India is estimated around 3.9 Trillion cubic feet in year 2020. The consumption is estimated to increase at higher rate than the production.

Indias current gas Demand-Supply scenario shows that there is a wide gap between demand and supply and the chasm is set to widen in the next five years. The 2010-11 figures reveal that the gas demand is around 253 MMSCMD and the indigenous supply stands at less than 155 MMSCMD. The gap is set to increase at a very fast pace. As per various analyses, the gap would vary between 70 and 100 MMSCMD in 2011-12 and by 2014-15 the gap would touch the whopping 180 MMSCMD mark.

E Q U I T Y R E S E A R C H R E P O R T

Companies Involved in Natural Gas production and transmission ONGC, Reliance Industries, Oil India, Cairn Energy etc, companies are mainly into production and exploration of the natural gas in India. Companies like Petronet LNG, Shell, and ONGC Mangalore are the suppliers of natural gas. They supplies both domestically produced gas and imported LNG. GAIL and GSPC are mainly into pipeline construction for LNG transport across India. GGCL, MGL, IGL, and BGL are the local distributors of the natural gas in respective cities. The above figure depicts the market structure of the natural gas in India. Petronet LNG: Petronet LNG is formed as joint venture by the Government of India to import LNG and setup LNG terminals in the country. The other promoters of the company are ONGC, HPCL, GAIL, and IOCL, with 12.5% of stake, each.

LNG Terminals in India


LNG Terminal Existing Dahej Shell Hazira Total Proposed Dabhol Kochi Mangalore Mundra Pipavav Ennore Total Capacity (MMTPA) 10 3.5 13.5 2.5 5 5 5 5 5 27.5

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Petronet LNG Ltd. has following terminals in India: Dahej Terminal Located at West coast, State of Gujarat (India) in the Gulf of Cambay Dahej terminal commenced operations in 2004 with the nameplate capacity of 5.0 MMTPA. Capacity expanded to 10.0 MMTPA in July, 2009 7.5 MMTPA of LNG sourced through Long Term Contract with RasGas, Qatar with back to back sales arrangement with GAIL, IOCL & BPCL Kochi Terminal Capacity - 5.0 MMTPA Tied up 1.44 MMTPA LNG from Exxon Mobils Gorgon Venture in Australia Progress on schedule, overall completion more than 90%, Scheduled Commissioning in 3rd Qtr. , 2012

Business Performance: The turnover during the financial year ended 31st March, 2011, was Rs. 13,265.24 Crores including other income as against Rs. 10,746.92 Crores in 2009-10. The net profit during the financial year ended 31st March, 2011, was Rs. 619.62 as against Rs. 404.50 Crores in 2009-10.

E Q U I T Y R E S E A R C H R E P O R T
The revenues of the company have grown with CAGR of 18.7% from 2007. The net profit has grown with 14.9% CAGR for the same period. GAIL Expansion Plans: The company is expanding its pipeline infrastructure from 7847 km to about 12000 km with the laying of new pipelines by 2011-2012. The total cost of the expansion is around Rs 30,000 crore.

GAIL (Gas Authority of India Limited): The companys core function is distribution of natural gas in India. The company has established 7847 km of Natural Gas pipeline with a capacity to carry 157 MMSCMD of natural gas across the country, which is 87.2% of total pipeline in India. The market share of the company in gas transmission in India is around 72%. GAIL has Joint venture companies in Delhi, Mumbai, Hyderabad, Kanpur, Agra, Lucknow, Bhopal, Agartala and Pune, for supplying Piped Natural Gas (PNG) to households and commercial users, and Compressed Natural Gas (CNG) to the transport sector. GAIL has also incorporated GAIL Gas Limited as wholly owned subsidiary for implementing City Gas Distribution (CGD) projects. Apart from the gas business, the company has 13,000 km of OFC network offering large bandwidth for telecom service providers. The company also has stake in China Gas Holding to explore opportunities in the CNG sector in mainland China.

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RIL & Reliance Natural Resources Limited (RNRL): Reliance Industries Ltd is one of the major companies in India in petroleum refining and oil and gas exploration and production sector. The company has natural gas reserves of around 11.3 trillion cubic feet in Krishna Godavari Basin (KG D-6 block). The oil and gas segment contributed around 26.6% of Earnings before interest and taxes in FY 2010-11. With the recent deal with BP to sell its 30% stake in KG basin blocks would likely to increase the contribution to the earnings of RIL. Reliance Natural Resources Limited (RNRL) is engaged in the business of sourcing, supply and transportation of gas, coal and liquid fuels. RNRL has been awarded an oil and gas block with acreage of about 3,619 Sq. Kms. in the state of Mizoram under the sixth round of the New Exploration Licensing Policy (NELPVI) for the exploration and production of oil and gas. The Company has received PEL for this block and has commenced exploration activities

E Q U I T Y R E S E A R C H R E P O R T

Indraprastha Gas Limited (IGL): The company is majorly into City Gas Distribution in Delhi and NCR. The company was incorporated in 1998 and got Delhi City Gas Distribution project from GAIL in 1999. The company is promoted by GAIL and Bharat Petroleum Corporation Limited. Each has 22.5% of stake in the company. The company distributes natural gas to consumers in - Domestic sector in form of PNG (Pipelined Natural Gas), - Transport and commercial sectors in the form of CNG. The CNG distribution by the company contributes to major part, around 89%, of the sales turnover. The rest 11% is contributed by PNG distribution. IGL currently supplies PipelinedNatural Gas (PNG) to about 0.17mn households compared to total of 4.3mn households using LPG in Delhi region. With rising awareness of advantages of PNG over LPG, the demand is expected to rise at high rate.

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Gujarat Gas Company Ltd (GGCL): The company is a private sector player in the natural gas transmission and distribution business. The company was incorporated in 1980. The company is promoted by BG Group having controlling stake of 65.12% in the company. FIs, FIIs, and public hold the remaining 34.88% of shares. The company supplies gas to around 317000 domestic, commercial and industrial users and around 144000 CNG users. GGCLs pipeline network is around 3700 Kms. Gujarat State Petronet Ltd (GSPL): Gujarat State Petronet Limited (GSPL or the company) is a public-private partnership established in 1998 by Gujarat State Petroleum Corporation Limited (GSPC), a company majority owned by the government of Gujarat, for the purpose of constructing and managing a statewide gas transmission network in the State of Gujarat. GSPL is the only natural gas transmission company in India that operates on an open access basis, i.e. it transports gas on behalf of third party shippers in return for a transport fee. The majority of GSPLs customers are power, fertilizer, chemical and steel plants that purchase natural gas directly from suppliers, as well as several local gas distribution companies who supply natural gas to retail consumers. The Company is currently transporting an average of 37 mmscmd of gas. In the recent development, the company has commissioned 1874 Kms of gas pipeline from Hazira-VadodaraAhmedabad-Kalol-Himmatnagar-Mehsana-Rajkot-Morbi-Anjar-Jamnagar-Jafrabad in a Gas Grid Project. Expansion plans: The GSPL-led consortium (in which the company has 52 per cent stake) has also received authorization from PNGRB (the energy regulator) for construction of three cross-country gas pipelines. The Mallavaram-Bhilwara, Mehsana-Bhatinda and Bhatinda-Srinagar pipelines entail laying of around 4,000 km of pipeline at a cost of around Rs 12,500 crore. Mahanagar Gas Limited: Mahanagar Gas Limited (MGL) is one of the natural gas distribution companies. Established in 1995, MGL is a joint venture between GAIL (India) Ltd, the BG Group, (U.K.) and the Government of Maharashtra. MGL has the natural gas distribution network in Mumbai and its neighboring areas. MGL supplies CNG to over 2 lakhs vehicles in Mumbai region. MGL also supplies natural gas to around 5 lakhs households and around 1100 small commercial and industrial establishments. The company has around 3300 Kms of pipeline network. Expansion: MGL has got authorization for developing CGD networks in the areas of Kalyan, Dombivali, Ambernath, Badlapur, Ulhasnagar and Bhiwandi in the district of Thane and some contiguous areas viz. Panvel, Taloja and Kharghar in Raigad District. MGL also has plans to develop CGD networks in a few more cities in Maharashtra in the coming years. The company has plans to expand the steel pipeline network to around 500 KM and PE pipeline network to about 5500 KM supplying over 4 MMSCMD of Natural Gas.

E Q U I T Y R E S E A R C H R E P O R T

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CONCLUSION: With Natural Gas expected to be the next biggest commodity, Investor can look to invest into the discussed stocks with a 2-5 Years perspective with Expected Target price as follows :

SCRIP PETRONET RELIANCE INDS IGL GAIL GUJRAT GAS GSPL

TARGET 500 2500 1400 700 1500 250

Research Analyst

E Q U I T Y R E S E A R C H R E P O R T

The Report is prepared by Mr.Srigopal Bajaj, Head of Research.


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