Gasprices will remain subdued even longer than crude: Mahanagar Gas MD

Natural gas will gain greater prominence in the future for India as the fuel basket changes to include cleaner sources of energy and as the price of natural gas falls internationally, Rajeev Mathur, MD of city gas distributor Mahanagar Gas Ltd (MGL), told BusinessLine in an interview. Edited excerpts.

Congratulations on your successful IPO. You didn’t use the process to raise fresh funds, why was that so?

How our finances have worked over the years is that we have been able to remain a zero-debt company and we’ve been able to generate enough cash in our business to fund our capex for the year. Our average capex for the last couple of years has been Rs 200-250 crore and going forward we are taking up some more projects in Raigad, we’re doing some enhancement of capacity in Mumbai and adjoining areas, and we’re trying to interlink our various networks. So all that will take capex of another Rs 50 crore annually, and our average capex will be Rs 250-300 crore going ahead. Our normal cash generation is on an average between Rs 500 crore and 600 crore annually, so that allows us enough opportunity to use our own funds as long as it is cheaper than borrowing,

The government has been talking about increasing gas consumption. How are you going to use this opportunity?

We think it is a tremendous opportunity as far as policy of the government is concerned, they are trying to promote cleaner fuels. As the government is committed to limiting CO2 emissions, natural gas will have to be used in much larger manner, as opposed to coal or crude oil. The first priority is city gas distribution projects and connecting more houses. The advantage this way is that we’re also doing away with subsidy as CNG is a non-subsidised product. Despite this, piped gas is cheaper than even subsidised LPG and there is reliability of supply. We’ve covered about 45-50 lakh households and we have to cover another 75-80 lakh in Mumbai. What we’ve done till now, we can do double of that from now on. We want to ramp up new connections every year from 80-90,000 now to 1,35,000 this year and 1,50,000 FY18 onwards. As new, smart cities come up, the opportunities are enormous.

What are your expansion plans for the Mumbai Metropolitan Region (MMR)? Are you bidding for other city gas distribution projects?

We’re evaluating some of the projects, and if they look attractive, we’ll bid. Assuming one gets authorisation for a city, it takes about five years to plan and develop the basic network, and from the sixth year onwards you start earning some cash, and from then on you try to increase concentration of network and get more customers on the grid. So it’s a long-drawn process (from winning the bid). In MMR, every year we will lay about 30-40 km of steel and 100 km of PE (polyethylene) pipelines. We already have 4,700 km of network in MMR. We’re going to take up Raigad district now where instead of building a grid, we’re looking at creating nodes or clusters and pipelines heading out from these. Instead of creating an entire grid and meshing it up, this method will make the rollout faster and suits Raigad since it is sparsely populated today.

What are your expectations of where crude oil and natural gas prices are heading?

There is an excess of crude oil in the market. The OPEC cartel doesn’t have the force it used to have, most producing companies are looking at maximising revenue while demand is subdued in US, Europe and China. India is chugging along with demand increasing at the same levels it did before. With all these factors at play and newer producers coming in, the availability of crude oil and natural gas has gone up considerably and demand has not kept pace with supply. This sort of a trend will take time to reverse and, if this is anything to go by, crude prices are likely to remain subdued. In the next year or so, I think crude prices will remain in a band of $10-12 from where it is now. Gas will be much more subdued, I think, with a lot more gas produced in US and demand falling in traditional guzzlers like Japan and Korea. Consumption in other countries hasn’t picked up in the manner they were expected to, so gas prices will remain subdued even longer than crude .

While earlier oil and gas prices moved in tandem with a slight lag, our view is that we will see a disjoint in this also happening in the future. While crude may go up to $60 in two years, gas will remain where it is or move only 5-10 per cent from where it is now.

COMMENT NOW