PDS kerosene waiver, LPG subsidy to increase GAIL's profitability

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Our Bureau

Kolkata, May 30

GAIL India Ltd on Monday announced that its profitability will increase following the recent hike in gas prices.

Though admitting that the hike will enhance operational costs of the company by Rs 875 crore, GAIL expects an even higher positive impact on account of waiver of PDS kerosene and LPG subsidy.

The company shared a subsidy burden of Rs 1,137 crore in 2004-05 including LPG subsidy of Rs 535 crore.

GAIL uses natural gas as feedstock for running compressors of HVJ pipeline, and for its petrochemicals and LPG plants.

Following the revision, it will now pay a price $3.86 per million British thermal unit (mbtu), which is equivalent to other industrial consumers and that of the prevailing re-gasified LNG (RLNG).

The company was previously offered natural gas at the administered price mechanism (APM) price.

"The adverse impact on account of rise in feedstock price will be more than offset by the cut in subsidy burden", the company said, adding that since it did not produce or market kerosene, the Government had already agreed to keep the company out of the kerosene subsidy burden (worth Rs 602 crore in 2004-05).

However, the company's claim that it would no longer be required to bear the LPG subsidy burden is dependent on the expectation that the formula based on which the subsidy was shared is no longer applicable to the company.

"The whole rationale behind the sharing of LPG subsidy burden was based on the premise that the company was using APM gas as its feedstock.

"Since the company will, henceforth, pay RLNG price of $3.86 per mbtu for its LPG feedstock, this premise no longer holds good."

When asked whether the Union Ministry of Petroleum had agreed to GAIL's proposition, company sources said, "With the proposed gas revision, GAIL would require to pay a price equivalent to the prevailing RLNG price for the gas processed, to produce LPG.

"This would mean that the premise on which GAIL was bearing the LPG subsidy no longer exists.

"Therefore, GAIL may not be expected to bear the under recoveries of oil marketing companies in the sale of LPG."

On whether the profitability would be affected if prices move beyond $3.86 per mbtu as proposed by the producers, the company said that as understood from sources in the Union Ministry of Petroleum and Natural Gas, the market related price would be subject to the cap of RLNG price of $3.86 per mbtu.

"Therefore, market related price is expected to be benchmarked up to the level of 3.86/mbtu in the near future."

During its last price revision, the Panna-Mukta-Tapti joint venture proposed a price of $4.08 per mbtu for supplies to GAIL.

While the Government intervention had finally settled the price at 3.86 per mbtu, the joint venture is realising $4.08 through its direct sales.

(This article was published in the Business Line print edition dated May 31, 2005)
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