We interacted with Gail India, Petronet LNG and officials across the value chain to evaluate ramp up of Kochi LNG terminal amidst new market of Kerala, Chennai and Karnataka. Although, the 5 MTPA project is on schedule to commission fully by Q4FY13, we see many external challenges to ramp up the terminal optimally. We hope for a repeat of success story in Dahej Terminal, however with higher LNG price, more difficult terrain, and relative lower consumer affordability challenges seem to be galore.
Core consumers find RLNG too pricey: NTPC Kayamkulam's gas based power plant (potential consumption of~ 1.2 MTPA) has been kept on hold as the beneficiaries are not ready to sign PPAs at current LNG price. BSES Kochi is waiting for KSEB's nod to convert from Naphtha to Gas based. Apart from the consumers along the phase 1 of Kochi Kanjarkkod pipeline, which will carry ~0.5-1MTPA till Udyogmandal, demand is yet to ramp up.
Southern Market new for latent demand: BPCL and Mangalore refinery are the potential consumers , however BPCL Kochi is expected to ramp up from 0.6 mmscmd to ~3 mmscmd by 2015-16 post expansion, whereas Mangalore refinery is waiting for pipeline to be laid with demand potential of ~1 mmscmd. Ernakulam was the only city considered as geographical area in 4th Round of CGD bidding which got cancelled. EOIs have been filed for 4 cities in Karnataka, however only two areas come along the pipeline route.
Difficult Terrain to lay Pipeline: Based on our interaction with industry channels, we could make out that Kerala is a difficult terrain to lay gas pipeline (Kochi - Kanjarkkod - Mangalore - Bangalore) as majority of the land area are farmlands, consisting of pucca houses and well informed people making it subject to several agitations, unlike in the northern regions, which consist more of barren lands.
Farmer compensation in dispute: Gail India is facing agitations in several districts along the route of gas pipeline. The agitated farmers whose land comes along the route of the pipeline are finding their support with many local politicians. Thus, the Right of Use (ROU) of the farmlands by the gas transporter and adequate compensation to the farmers (10% of the market value, as per PPM act) is still in dispute and yet to be determined by the state government. Gail India has proficiently dealt with such issues before.