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Raghuvir Srinivasan

DPC is a good opportunity for GAIL to strike out into newer areas in search of growth. The company has been conscious of the fact that it has to break out of its shackles of being a mere gas marketer; the foray into petrochemicals three years ago and into telecom now are all manifestations of its need to diversify and grow.

IT IS THE unexpected third bidder for Enron's stake in the troubled Dabhol Power Company, and the one with the least presence in the power sector. All that it has to show for experience is its equity participation in a small 156.1 MW gas-based power project promoted by a Gujarat Government company in Hazira. Yet, the bid by Gas Authority of India Ltd (GAIL) for DPC is significant from the point of view of its future growth.

The bid could significantly alter GAIL's risk profile. DPC is a troubled project and will not be a straightforward acquisition. A lot would depend on the restructuring of its debts and, of course, re-negotiation of the power purchase agreement with the Maharashtra State Electricity Board. Besides, GAIL would need to rustle up Rs 2,500-3,000 crore if it wants to buy out Enron's stake at around $500 million, which is about the price being discussed.

This will be in addition to the Rs 3,000 crore GAIL is investing in the capacity expansion of the Hazira-Bijaipur-Jagdishpur (HBJ) pipeline and in its telecom division. GAIL is a Category II service provider and in the first phase has leased out bandwidth to Bharti Telesonics in the Delhi-Bijaipur (MP) sector. That would make it a total investment of around Rs 6,000 crore in the next year or two for GAIL.

The company is cash-rich and cash flows are healthy and steady given the nature of its business. In 2000-01, GAIL had a cash profit of about Rs1,700 crore, which is quite healthy. But it would still need to raise fresh funds, debt or equity, if it wants to expand and also acquire DPC. GAIL has said that it would raise about Rs1,500 crore in the domestic market, which would leave a hole of Rs 4,000-4,500 crore to fill from internal generation. GAIL would also be entering a complex industry where it has absolutely no experience.

Yet, DPC is a good opportunity for GAIL to strike out into newer areas in search of growth. The company has been conscious of the fact that it has to break out of its shackles of being a mere gas marketer; the foray into petrochemicals three years ago and into telecom now are all manifestations of its need to diversify and grow. Within the main business too, GAIL has been preparing for deregulation and competition; it has signed up strategic agreements to explore business opportunities in the gas sector with three companies — Shell, Unocal and Gazprom of Russia.

For GAIL, the biggest attraction in DPC is obviously the LNG terminal and storage facility. DPC has installed facilities to import 5 million tonnes per annum of LNG and, more important, fully tied-up the LNG source.

In the LNG business, locating suppliers is the most critical issue as most of the natural gas sources in West Asia are tied-up. DPC has an assured source in the Abu Dhabi National Oil Company, and LNG shipments ought to have been underway by now had everything gone well with the project.

GAIL is a co-promoter of the Petronet LNG project at Dahej, which again involves a 5 million tonnes per annum terminal on the Gujarat coast. But that is likely to be commissioned only by 2004 while the Dabhol terminal can be made operational almost immediately.

Of the total of 5 million tonnes, 2.1 million tonnes would be consumed by the power plant leaving just under 3 million tonnes to be marketed independently. Of course, the evacuation of the gas could be a problem in the near term till GAIL figures out a way to move it from Dabhol. One choice could be the construction of a pipeline from Dabhol to Hazira to link up with the HBJ pipeline — a distance of about 600 km. The gas from Dabhol can then find its way into the hinterland markets.

For GAIL it is important to keep its resource base in terms of gas sources growing, which alone can ensure growth in its main business. With production from Bombay High on the wane, newer sources on the west coast are crucial which is why Dabhol is so attractive to the company.

It would be crucial for GAIL to find a partner to run the power project. DPC lends itself to a bifurcation of facilities between the power plant and the LNG terminal. An independent take over of the power plant now could prove a little more than what GAIL can handle given its competencies and the focus on the main business of gas marketing.

These are issues that would unravel in the next few weeks. Meanwhile, GAIL would have to exercise maximum caution in the due diligence for DPC which is a complex interplay of padded project cost, high-cost foreign exchange loans, a loaded power purchase agreement, and a customer who neither has the appetite for the power that it produces nor can afford it. GAIL's failure to play its cards well could end up turning a promising opportunity into a major liability.

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