GAIL India Ltd.

Company Analysis

Dimple Singh Date: 20 Nov 2009

Company overview

The company was previously known as Gas Authority of India Ltd. It is India's principal gas transmission and marketing company. It was set up by the Government of India in August 1984 to create gas sector infrastructure. GAIL India is the country’s largest gas transmission company and handled 82 million standard cubic meters per day (mmscmd) out of the 111 mmscmd of gas supplies in FY08.

The company has a pipeline network of 7,000 kms in place. Its pipeline is the lifeline for major gas consumers from the power and fertilizer sectors. It has also ventured into upstream gas exploration business in order to reduce dependency on a single source of supply and has secured 30 exploration blocks. GAIL is a significant player in downstream petrochemicals business with a production capacity of 410,000 tons per annum. It is also an early mover in city gas distribution with 8 joint ventures and a wholly owned subsidiary, GAIL Gas, is being incorporated. The company has plans to enter into more than 230 cities.

GAIL is listed by Forbes as one of the world's 2,000 largest public companies in 2007.

GAIL commissioned the 2800-km Hazira-Vijaipur-Jagdishpur (HVJ) pipeline in 1991. During 1991-93, three liquefied petroleum gas (LPG) plants were constructed and some regional pipelines acquired, enabling GAIL to begin its gas transportation in various parts of India.

GAIL began its city gas distribution in New Delhi in 1997 by setting up nine compressed natural gas (CNG) stations.

In 1999, GAIL set up northern India's only petrochemical plant at Pata.

Company Profile

GAIL (India) Limited is India's flagship Natural Gas company, integrating all aspects of the Natural Gas value chain (including Exploration & Production, Processing, Transmission, Distribution and Marketing) and its related services. GAIL is also expanding its business to become a player in the International Market. The company dominates the gas sector, transporting 95% of the total piped gas. It also operates seven plants to process natural gas into LPG, apart from having a small presence in the petrochemicals and oil & gas exploration sectors. Company has expanded its operations into gas processing, petrochemicals, liquefied petroleum gas transmission and telecommunications. It has also extended its presence in power, liquefied natural gas re-gasification. Company has set up Gas Technology Institute near Delhi. This Institute is fully functional with well-equipped laboratories for research and development (R&D) related mainly to the gas sector. It would pursue joint R&D projects in India and abroad in association with oil and gas companies, research institutions and universities.

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Organization structure:

Gail organization consists of board of directors as follow;

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GAIL MANAGEMENT

BOARD OF DIRECTORS

DR. U. D. CHOUBEY

CHAIRMAN & MANAGING DIRECTOR

SH. R. K. GOEL

DIRECTOR (FINANCE)

SH. SANTOSH KUMAR

DIRECTOR (PROJECTS)

SH. A. K. PURWAHA DIRECTOR (BUSINESS DEVELOPMENT)

SH. B. C. TRIPATHI

DIRECTOR (MARKETING)

PART TIME DIRECTORS

SH. S. SUNDARESHAN PROF A.Q. CONTRACTOR

DR. A. K. KUNDRADR. U. K. SEN

SH. D. N. NARASIMHA RAJU

DR. AMIT MITRA

CHIEF VIGILANCE OFFICER

SHRI ARUN SINGHAL

COMPANY SECRETARY

SH. N. K. NAGPAL

Business description in brief

Currently the business set up is as such

7 LPG Gas Processing Units to produce 1.2 MMTPA of LPG and other liquid Hydrocarbons.

1,922 km of LPG Transmission pipeline network with a capacity to transport3.8 MMTPA of LPG

13,000 km of OFC network offering highly dependable bandwidth for telecom service providers.

6,700 km of Natural Gas high pressure trunk pipeline with a capacity to carry 148 MMSCMD of natural gas across the country

North India's only gas based integrated Petrochemical complex at Pata with a capacity of producing 4,10,000 TPA of Polymers

27 oil and gas Exploration blocks and 3 Coal Bed Methane Blocks

13,000 km of OFC network offering highly dependable bandwidth for telecom service providers

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

Participating stake in the Dahej LNG Terminal and the upcoming Kochi LNG Terminal in Kerala

GAIL has been entrusted with the responsibility of reviving the LNG terminal at Dabhol as well as sourcing LNG

Established presence in the CNG and City Gas sectors in Egypt through equity participation in three Egyptian companies: Fayum Gas Company SAE, Shell CNG SAE and National Gas Company SAE.

Stake in China Gas Holding to explore opportunities in the CNG sector in mainland China

A wholly-owned subsidiary company GAIL Global (Singapore) Pte Ltd in Singapore

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Market share in India

Leader in Transmission

It enjoys the market share in India of

85% of the natural gas market

88% in gas transmission

15% of petrochemical consumption

The company enjoys a market share of 88% in the natural gas and LPG transmission. Currently it has huge trunk pipeline of the length of around 5,400 Kms across various regions in India. The capacity of the pipeline is to carry 130 mmscmd of natural gas of which it carried 77mmscmd of natural gas. Significant contribution arrives from the HVJ pipeline with the length of 2,800 km and carrying capacity of around 60 mmscmd. 2,800 km long Hazira – Vijaipur - Jagdishpur (HVJ) pipeline and 610 km Dahej-Vijaipur pipeline (DVPL) cater to all the gas based power plants, fertilizer plants, and industries along the entire West-North corridor of India.

Source-integrated energy policy

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Revenue generated from various sectors.

The exploration business has an advantage of high margins. In spite of that the revenues are bound to increase with exploration being added to the portfolio. The transmission and petrochemical business is bound to benefit from the exploration venture due to vertical integration.

The polymer production capacity of Pata has increased from 3, 10,000 TPA to 4, 10,000 TPA by addition of new cracker furnace and a new polymer unit. Petrochemical is one of the major thrust areas of your Company and is contributing significantly in the profitability of the Company.

Source-annual report2007-08

The business of the GAIL is divided in the six segments named as Gas transmission, Gas trading, LPG transmission, Petrochemicals, Liquid HC and unallocated sector. The revenue for gas transmission segment increased by 4% in comparison to 2006-07, similarly for the Gas trading sector it increased by 8%. LPG segment seen a growth of 12 % while the petrochemicals sector saw growth of 18%, Unallocated sector saw the highest growth of

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76% followed by Liquid HC of 33%.This shows the success path of company.

Subsidiaries and Joint ventures

Company has been the pioneer for City Gas Projects in India. With natural gas emerging as the fuel of choice in the country, Company believes that the next decade will belong to the city gas. It was the first Company to introduce City Gas Projects in India for supplies to households, commercial users and for the transport sector by forming Joint Venture Companies.

Subsidiaries are as follow:

GAIL Gas limited

Company has formed a wholly owned subsidiary named ‘GAIL Gas Limited’ for implementing City Gas Projects and CNG corridor in the country. The subsidiary company will act as a vehicle for bidding for laying pipeline infrastructure in the country.

GAIL Global (Singapore) Pte. Limited

Company has a wholly owned subsidiary, namely, GAIL Global (Singapore) Pte. Ltd. to manage investments abroad. Company is looking for further business opportunities through this subsidiary company.

Brahmaputra Cracker and Polymer Limited

Company has 70% equity share with Oil India Limited (OIL), Numaligarh Refinery Limited (NRL), and Govt. of Assam, each having 10% equity share. The authorized capital of the company is Rs. 1,200 Crores. A Feedstock Supply Agreement has been signed between Brahmaputra Cracker and Polymer Limited (BCPL), and all the three suppliers viz., Oil and Natural Gas Company Limited, Oil India Limited and Numaligarh Refinery Limited. Financial closure for the project is likely to be completed during the year 2008-09.

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Joint Ventures

Aavantika Gas Limited (AGL)

AGL is a Joint Venture of GAIL and Hindustan Petroleum Corporation Limited (HPCL) for implementation of City Gas Projects in the cities of Madhya Pradesh.

AGL has started project implementation activities in the city of Indore. Company has 22.5% stake in the Company along with HPCL as equal partner.

Bhagyanagar Gas Limited (BGL)

BGL is currently operating three Auto LPG stations in Hyderabad and one Auto

LPG station in Tirupathi. It is currently operating six CNG stations in Vijayawada and three CNG stations in Hyderabad. Company has 22.5% stake in the

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company along with HPCL as equal partner.

Central U.P. Gas Limited (CUGL):

CUGL is currently operating five CNG stations in Kanpur, one CNG station in Bareilly and one CNG station in Kanpur is under commissioning. CUGL is building MDPE network for supply of PNG to domestic, commercial and industrial sectors in the city of Kanpur. Company has 22.5% stake in the company along with BPCL as equal partner

Green Gas Limited (GGL):

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GGL is currently operating four CNG stations in Lucknow and three CNG stations in Agra. GGL will also take up project implementation in other cities of Western UP on the basis of gas availability and project viability. Your Company has 22.5% stake in the company along with IOC as equal partner.

Indraprastha Gas Limited (IGL)

IGL is supplying piped gas to around 1 Lac domestic, 276 commercial, 16 small industrial consumers and CNG to over 1.35 Lacs vehicles through 153 CNG stations. IGL is catering to world’s largest CNG bus fleet of over 11,000 buses in Delhi. Company has 22.5% stake in the company along with BPCL as equal partner

Mahanagar Gas Limited (MGL)

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MGL has set up 128 CNG stations catering to over 1.85 Lacs vehicles spread

over Mumbai, Thane, Mira- Bhayandar and Navi-Mumbai areas besides supplying PNG to over 3.40 Lacs domestic, 907 commercial and 36 small industrial consumers. Company has 49.75% stake in the company along with British Gas as equal partner.

Maharashtra Natural Gas Limited (MNGL)

MNGL is a Joint Venture of your Company and Bharat Petroleum Corporation

Limited (BPCL) for implementation of City Gas Projects in Pune city. MNGL is developing necessary infrastructure for supply of CNG and PNG in the city. Company has 22.5% stake in the company along with BPCL as equal partner.

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Petronet LNG Limited (PLL)

PLL was formed for setting up of LNG import and regasification facilities. PLL has a long term LNG supply contract with Ras Gas, Qatar for import of 7.5 MMTPA. PLL Dahej terminal is being expanded to 10 MMTPA capacity. Company has 12.50% stake in the company along with BPCL, IOC and ONGC as equal partners.

Ratnagiri Gas and Power Private Limited (RGPPL)

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RGPPL is a Joint Venture Company between your Company, NTPC, Financial Institutions and MSEB. Your Company has 28.33% stake in the company along with NTPC as equal partner. The capacity of the Ratnagiri Gas & Power Station is 2,150 MW.

Company has made an investment of Rs. 500 Crores and has approved additional equity of Rs. 475 Crores to RGPPL, out of the Rs. 475 Crores; an amount of Rs. 92.90 Crores has been paid during the month of May, 2008.

Tripura Natural Gas Company Limited (TNGCL)

TNGCL is presently supplying gas to 6600 domestic, 104 commercial, 21 industrial consumers and has set up one CNG station in Agartala city. Company has 29% stake in the company. Company has approved formation of JV for City Gas Projects in Vadodara with Vadodara Mahanagar Seva Sadan (VMSS) with 26 percent equity, while VMSS will have 24 per cent equity. The balance 50 per cent equity will be held by strategic investors and public. A JV agreement has also been signed with HPCL for city gas projects in Rajasthan.

Business operation

I

1) Upstream Operation

Overview

Every cloud has a silver lining and every adversity hides an opportunity. GAIL's Exploration and Production (E&P) unit was born in just such a scenario. As the Indian Economy opened up around the year 2000, the business environment changed dramatically. For GAIL, liberalization meant competition in core business i.e. midstream and downstream national gas distribution No longer could they rely on statutory support mandating secured sources of Natural Gas. The reserves contained in existing contracted fields were fast depleting. Apart from securing sources for Natural Gas, there were other compelling reasons for GAIL to get into E&P:

Integration in supply-chain

Gail India

Upstream

Operation

Midstream

Operation

Downstream

Operation

Overseas

Operation

Petrochemical

(LPG)

Infrastructure

(Pipeline)

Large gap in Gas demand and supply

National Gas security

Balancing of Business portfolio

Global opportunity

So that GAIL ventured into E&P in 2001. At the end of 2007-08, it has invested Rs. 11.5 billion in this segment. It is involved in oil & gas exploration activities over acreage of 1.7 square km. It has participating interest ranging from 10 to 80 percent in following.

24 domestic blocks

3 overseas blocks

3 CBM

GAIL is currently participating in 27 exploration blocks, in Basins such as Mahanadi, Mumbai, Cambay, Assam-Akaran, Tripura Fold Belt and Cauvery. GAIL has partnership in these blocks with various companies such as ONGCL, GSPCL, OIL, Hardy Exploration & Production, Petrogas, JOGPL, Daewoo, OVL, IOCL, Korea Gas Corporation, Hallworthy, BPCL, HPCL and Silver wave. GAIL also has stake in 3 overseas blocks (A-1 and A-3 blocks in Myanmar and Block-56 in Oman).Of these, nine are offshore blocks and eighteen onshore blocks, of which 13 are deepwater and 5, are shallow water.

Coal Bed Methane (CBM) is stored in coal seams and was generated during the process of coalification. It occurs within these seams either as free gas in fractures or in dissolved form in water. The consortium of GAIL (India) Ltd., Arrow Energy (India) Pty Ltd., EIG Energy Infrastructure Group AB has been awarded 3 CBM Blocks in CBM-III Bidding round. The Tata Power Company is also a consortium partner in two of the awarded blocks. These blocks are in Rajmahal (Jharkhand), Mand Raigarh (Chattisgarh) and Tata Pani Ramkola (Chhattisgarh)

2) Midstream Operation (Petrochemicals)

Overview

The company has seven gas LPG processing plant with total capacity of 1.2 mtpa 4 plants are situated along the Hazira Vijaipur Jagdishpur pipeline (two at Vijaipur in Madhya Pradesh , one at vaghodia in Gujarat, and one at oriya in Uttar Pradesh , and one each in Lakwa Assam , Usar , Maharashtra an d Gandhinagar Gujarat). The total liquid hydrocarbon production was over 1.348 million tonnes, which included 1.043 MT of LPG 0.156 tm of propane and 0.074 tm of pentane the company’s board of director has recently approved them doubling capacity of its pata petrochemical complex in UP to 0.8 mtpa .the installed polymer capacity at pata is 0.41 mta, which will be increased by leveraging existing facility and augmenting them. Company is setting up 280000 tpa petrochemical plant in Assam at an

investment of Rs 54.6 billion. It has also signed an agreement with HPCL, OIL, Mittal investment and France total to set up another petrochemical complex and crude oil refinery at Vishakhapatnam in AP.GAIL has a 70% equity stake in Brahmaputra cracker and polymer limited. The other equity partners are OIL, Numaligarh Refinery Limited and the Govt of Assam is having a 10% equity stake

Pipeline Operation

Interstate pipelines provide open access for shipment of natural gas. Gas enters an interstate pipeline from gathering systems and from interconnecting pipelines. Beginning at individual wellheads, gathering systems usually consist of smaller diameter pipe operating at lower pressure. Gas conditioning is usually performed to reduce contaminants such as water from gathered gas before it is compressed into the transmission system. Gas leaves the transmission system through delivery points to other interstate pipelines, local distribution companies and directly to end users such as industrial facilities and power plants. Local distribution systems deliver gas to residential, commercial and industrial end users.

The basic components of an interstate pipeline include steel pipe, valves, and compression, processing and storage facilities. Pipe sizes vary widely with much of the pipe in the 20-inch to 36-inch diameter range and wall thickness of about one-quarter to one-half inch. A typical range of operating pressures for a transmission system is 300 to 1440 psig. Powered by natural gas or electricity, compression is one of two types: reciprocating or centrifugal. Processing facilities extract undesirable contaminants (such as hydrogen sulfide and water) and marketable hydrocarbons (such as propane and gasoline). Storage facilities have been developed from depleted oil fields, coal mines, salt domes, aquifers and reefs. These facilities can be used for peak-shaving hourly demands and short-term, as well as, seasonal storage of gas.

Much of the gas that is transported on interstate pipelines is nominated, that is, scheduled in advance of actual gas flow. Deliveries into local distribution companies that serve weather-sensitive markets, however, cannot be known with absolute certainty. Such demand is met in part with "no-notice" service, which is usually supplied from inventories of the customers' gas, which is stored in the pipeline's storage facilities.

3) Downstream operation

Overview of CGD Operation

Potential of City Gas Networks in India

Natural Gas usage in Indian cities has been limited primarily due to the scarcity of supply. However this scenario is undergoing change with several LNG projects/transnational pipelines under implementation, which together with new domestic Gas finds are expected to shore up the supply deficit in the next few years. Meanwhile the market for city gas distribution is also set to grow at an accelerated pace. The CNG demand got a boost with the Supreme Court directive on pollution reduction in 12 major cities in India.

The domestic segment is also expected to grow with the government's intentions to remove the subsidy on LPG cylinders in a phased manner in 3-5 years making piped gas even more economical.

4) Overseas Operation

GAIL has a 10 % equity stake in block A! Ink Myanmar where huge gas reserve has been discovered recently. It also has a 10 % stake in block A3. It has stake in block 56 in Oman. However GAIL’S share in the blocks has been reduced following Myanmar’s national oil company exercising its “step in” right’s to 8.5%. In 2003 -04 GAIL acquired equity stakes in CGD project of fayum gas and shell gas in the Egypt. GAIL has setup a wholly owned subsidiary on Singapore , christened GAIL Global private limited, two undertake overseas investment , the subsidiary a 15% equity stake in the Egyptian national gas company- one of the largest natural gas distributing companies in the private sector in Egypt. The company also has a 50% stake in a JV formed with china gas holding limited to undertake projects in china, India and other countries.

SWOT ANALYSIS

Strengths: are as follow

GAIL (India) LIMITED is the country’s largest gas transmission company in India with 88% market share. Through that Gail acts as a single gas transmission company, and taking the leverage through this dominance.

GAIL (India) LIMITED currently owns and operates around 58% of the total onshore pipeline network, which shows its potency.

GAIL is present in complete value chain of Gas business, through transmission, gas processing to marketing.

Gail (India) has signed a technology license agreement with Mitsui Chemicals for a second high-density polyethylene (hdPE) plant at its Pata petrochemical complex in Uttar Pradesh, India.

Vertical integration in complete Gas business leading to cost reduction.

GAIL is dominating player in natural gas trading. Through 85% market share Gail is showing its control in the market.

Major petrochemicals involvement is also showing its strength.

Strong Revenue Growth (turnover of Rs. 18,008 Crores in FY 2007-08, a 12% increase, as against Net Sales of Rs. 16,047 Crores in the previous year)

GAIL is Going global in exploration business, company is growing in all its business segments

Controls gas transmission infrastructure for example: Pipe lines.

Share of LNG import projects and strong and Diversified Asset Portfolio

Weakness: are as follow

The biggest problem which is faced by GAIL is “High Subsidy burden” which is reducing LPG realization. As a PSU

Gail has to accept all rules and regulation of government.

There is no tax benefit with respect to Section 80IA since Demerger is delayed.

GAIL has less visibility over the contracts for new expansions in transmission business.

Gail has very limited financial or operational freedom as a government undertaking.

Cost and efficiency disadvantages

Lack of upstream gas exposure

Limited Exposure to Global Markets

Weak Capital Returns

Opportunities:

GAIL finds huge gas in KG and Mahanadi basin increasing the availability of natural gas.

Petrochemical industry expected to grow at CAGR of 17% over a period of 3 years. This growth need petrochemicals capacity expansion

The overall gas production is set to double within 3 to 4 years thus demand meeting the supply .This may result in government deregulating the natural gas prices.

Leveraging pipelines for Telecom.

Entering into exploration business, which is going to boost the realization.

Potential for efficiency gains

Transmission system upgrading/expansion

Strong domestic energy demand growth.

Increasing Demand for LNG

Expanding Indian Natural Gas Market

Threats:

Rise in natural gas prices can lead to reduction in margin in petrochemical business. The main problem is that the price of gas is regulated by the government.

Domestic marketing makes the company subject to threat of subsidy burden and pricing policies of petroleum ministry.

Petrochemical prices may go down in the next two years on account of capacity additions in the industries.

Rising investment requirement for new upcoming project.

Changes in national energy policy.

Intense Domestic Competition

Shift to Alternative Sources of Energy like hydro energy, nuclear energy, wind energy, thermal energy.

Fluctuation in Gas and Petrochemical Prices