Companies & Sectors
Petroleum Regulator PNGRB’s model Gas Transmission Agreement could open a Pandora’s Box

In the case of the PNGRB’s model guidelines for Gas Transmission Agreements, even as the intent may seem good, uniform provisions may not be workable, says Nomura Equity Research

The Petroleum & Natural Gas Regulatory Board (PNGRB) has issued Development of Model Gas Transmission Agreements (GTA) guidelines, providing provisions which are to be applied uniformly to all GTAs. Several provisions, such as uniform ship-or-pay (SOP) exclusion of volumes on government directives, are contentious and seem skewed toward consumers (at the cost of transmitters). Even as intent may seem good, uniform provisions may not be workable, according to Nomura Equity Research in a Quick Note on the subject.

 

Nomura says that each GTA can be different, depending on source (APM—Administered Price Mechanism, domestic–private/ government, marginal, Coal Bed Methane, LNG–long/short term, etc, term—days, weeks, months, years) and customer’s needs (power, CGD— city gas distribution—have unique needs) and may need bespoke provisions.

 

In Nomura’s view, model guidelines as the name suggests should be just guidelines. But, these guidelines are effective immediately (15 November 2012), and require modification in all existing contracts. This could be problematic, and may open a Pandora’s Box. None of the key gas transmitters would implement these on their own. And, if regulators try to enforce them, companies would challenge the norms. Skewed against transporters; SOP provision is the most contentious. For example:

 

  • Uniform 90% ship-or-pay (SOP) liability on annual basis—to be levied provisionally at 95% on monthly basis with final adjustment annually.
  • From SOP specific exclusion of quantities reduced due to direction of central/state government or any government agency.

 

Nomura points out that the 90% annual SOP provision not in line with the tariff determination method. Most current GTAs have 90%-95% SOP provisions (few also have 100%), and most are reconciled on a monthly basis. Transmitters seek high SOP (90%-100%) and early settlement (daily or monthly). The reasons include:
 

  • For tariff determination, the PNGRB uses 100% capacity, and any underutilisation due to lower throughput is not compensated immediately.
  • Annual reconciliation leads to revenue losses for periods when capacity is not used. Unlike product or commodity, pipeline capacity not used is lost forever and thus need for real-time settlements.
  • Monthly/annual reconciliation would also be difficult under a new Service Tax regime, as per gas transmitters.

 

Nomura explains that consumers, on the other hand, want more liberal norms. For example, given their unique needs CGD companies demand no or very low SOP provisions, with liberal annual or quarterly settlement. Power companies also seek flexibility, as their demand has a lot of fluctuation.

 

Nearly 19% of GAIL and GSPL’s (Gujarat State Petronet) combined transmission revenue would be due to SOP charges, on Nomura’s estimates. But, as some KG-D6 volumes have been replaced by LNG in the same contract, Nomura analysts think that actual impact would be somewhat lower at 10%-15%. Companies do not separately provide break-up of ship-or-pay volume or revenue. Nomura estimates that a 10% reduction in transmission revenue would impact GAIL’s FY14 EPS by 6% and GSPL’s by 15%. But, such exclusions not legally tenable, says Nomura.

 

In Nomura’s view, all GTAs are legal binding contracts. And, any reduction due to government directive impacts commercial terms, and should attract contractual SOP provisions. Government directives are often done on an ad-hoc basis, and transmitters which have made substantial investment should not suffer due to such decisions. Government directives are not force majeure events.

 

Other key provisions which are also skewed against transmitters include:

  • If a transporter uses system-use gas (would also include unaccounted gas), it would need to be paid for at prevalent market price. Nomura’s view: PNGRB has consistently disallowed unaccounted gas and even normative system-use gas (0.6%) while determining tariffs, despite demand by most transmitters. Presently in most contracts, any additional gas losses are considered as transmission loss, and borne by shippers. It is unlikely transmitters will agree to bear the cost of these losses, unless compensated in the tariff determination process.
  • Increase in LD (long distance) charges sought for shortfall due to transporters fault from current levels of 50% to 90% of tariff. Transmitters have argued that any LD compensation should be limited to what service providers can forgo, i.e., its profits or return on equity. Nomura’s view is that it is negative for transmitters. However, instances of such defaults are rare.

 

Nomura concludes that PNGRB’s focus remains on consumer interest and not entities.

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