India's affliction of 'gas shortage' is set to be alleviated. The KG gas find is slated to transform the domestic demand-supply scenario of natural gas over the next decade. While KG gas would obviously be a big positive for producer Reliance Industries (RIL), it will also materially affect the fortunes of potential consumers of this gas such as power and fertilizer units, gas transmission entities and city gas distribution (CGD) players. Also, the output from the field will help improve the current account deficit as naphtha gets replaced by gas and fertilizer imports reduce (we expect US$1.4bn of saving in India's annual import bill). The only deterrent we see affecting the timely monetization of this gas is the legal dispute between RIL and NTPC/ RNRL. While hampering negotiations with potential customers, it could also affect the pricing (and hence economics) of this project.
With KG, it'll raining gas...: The full complement of 80 mmscmd of gas to flow from KG D6 field will almost wipe out the supply gap (90-100 mmscmd) in the near term. However, the supply could affect expansion plans of LNG players as some capacities lie idle in the near term with lower demand for expensive R-LNG.
...a blessing to many: With potential accretion of Rs457/ share in NAV, RIL stands to benefit materially from KG gas. Besides GAIL (transmission player), NTPC, GVK, GMR and Lanco (consumers of this gas) would also benefit owing to higher output and PLFs. The power sector can achieve 30,000m units (4,000MW) of incremental production and fertilizer units 6m tpa of additional output from this gas. Power producers can save another Rs70bn by substituting costlier alternatives with gas. However, a speedy resolution of the legal tangle between RIL and NTPC/ RNRL is awaited regarding the availability and pricing of this gas.
The government gains the most: With accumulated cash flow accretion going up to US$17bn (profit petroleum + taxes) and additional cost savings/ import substitution of up to US$15bn over the next decade, the gas find helps alleviate the current account deficit materially. At Rs71bn (US$1.4bn) of savings annually, we expect the current account deficit to reduce by ~1.5% of GDP.
| Key beneficiaries of KG D6 gas | ||
| Beneficiary | Extent of benefit | Comments |
| RIL | Accretion of Rs457/sh in NAV | 80 mmscmd = ~30% of total domestic gas production in FY12E |
| NTPC | Additional 6,000 units of power | Cost of production lower by Rs3bn-Rs14bn* |
| Other IPPs | Additional 9000 units of power | Cost of production lower by Rs5bn-Rs21bn* |
| Fertilizer sector | Additional 6m tonnes of production | Cost of production lower by Rs0.65bn-Rs1.8bn* |
| GAIL | Additional transmission volumes of 30 mmscmd | Incremental revenues and EBIT of Rs15bn and Rs8bn respectively from this gas over FY10-12E |
| CGDs | Additional volumes of ~2.5 mmscmd | Pick up in rollouts in new cities |
| Government | Additional cash flow of ~US$17bn over the life of KG D6 | Savings of US$1.4bn annually, from additional production of fertilizer, power and import substitution |
| Source: IDFC-SSKI Research; Company reports *compared to RLNG & naphtha respectively | ||
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