INDIA: GAIL GALE: STORMY WEATHER AHEAD?

by Santanu Saikiaby

How many roads must a man walk down Before you call him a man?...
How many times must a man look up Before he can see the sky?...
The answer, my friend, is blowin' in the wind, The answer is blowin' in the wind.

Just as a hurricane appears to be sweeping across the Indian gas market, UD Choubey has anchored in as the chairman and managing director of GAIL. This, at a time when the paradigm has changed -- the oil sector is, undoubtedly, undergoing a dramatic transformation with the old order being forced to make way for the new; and, in these troubled times, more than any other organization in the petroleum business today, GAIL finds itself in the eye of the storm; at the vortex of the vicissitude.

Following rapid liberalization of the E&P sector; the advent of gigantic discoveries in the Krishna-Godavari basin; and the aggressive network-building by players, with deep-pockets, like Reliance Industries Ltd, the basic premise on which GAIL had built its strength in the past, is beginning to look shaky today. As it happens, the old regime, under which GAIL had once prospered, is all but buried now. For instance, GAIL will no longer be able to charge transmission rates of its own making. The days when companies made a beeline for allocations out of a limited pool of gas from ONGC's Mumbai High fields, are all but nostalgic memories of the past. The all-powerful Gas Linkage Committee -- through which bureaucrats and politicians doled out precious parcels of gas to a lucky few -- has been wound up; all it remains is a minor footnote in history.

The new gas pipeline policy, and the common carrier principle that it fosters, has clearly broken the gas major's monopoly over cross-country pipelines. For the most part, an independent regulator has shifted the oversight burden away from the government. The symbiotic relationship between the petroleum ministry and GAIL has been broken -- that there is a conflict of interest in playing both a regulator and an owner is now well established. While the regulatory framework is undergoing a sea change, the market too has fragmented as companies have begun demanding the best price for the gas they produce. The number of sellers has multiplied and prices have fragmented. GAIL is now just one of a growing list of buyers for gas in what is becoming an openly competitive environment.

No one is perhaps better equipped to understand the changed circumstances than Choubey himself. He has witnessed GAIL evolve, reinvigorate, and reduce, itself over the last two decades. As marketing director for two-and-a-half years, Choubey has seen increasing competition chip away at GAIL's once-undisputed power. He was there to see the tables turned: the almost pitiful sight of GAIL being forced to coax and cajole a set of reluctant buyers to enter into contracts for LNG imported through the Dahej complex. The transition couldn't have been less than traumatic. Today Choubey competes with a long list of sellers of spot LNG cargoes for a relatively small slice of the pie. Increasingly, he can't rely on the government to bail him out of a tight corner. The ministry has had to back off from an earlier ruling allowing GAIL to retain Rs 600 crore of extra network tariff that the Tariff Commission had accused the company of charging from customers in Andhra Pradesh. The days when rent could be earned by virtue of its monopoly standing are over once and for all.

In a sense, Choubey faces a much tougher challenge than any of his other counterparts in public sector petroleum companies which are also transiting into a free market environment. For no other company faces as painful a change of role as GAIL in the immediate future. A quick stock-taking of the fortunes of these companies puts GAIL, unfortunately, at the lowest rung of the pecking order.

There is no doubt that ONGC's standing is challenged by newer E&P players but it will be a long time, if ever, before any private outfit is able to challenge its pre-eminent position. True, reserve accretions have been low in the past but recent promise of large gas discoveries in the KG and Mahanadi basins has added strength to the public sector E&P giant. As for the trio of public sector oil marketing companies -- IOC, BPCL and GAIL -- they are savouring the benefits of a one-sided subsidy dispensing mechanism that has all but wiped out private competition in the retail market for petroleum products. It will take years for companies like RIL, Essar and Shell to come out of the drubbing suffered in the past one-and-a-half years on the marketing front.

In contrast, the threats to GAIL are more real and immediate. Riding on the back of its D-6 and NEC-25 discovery, RIL has proposed a slew of pipelines across the length and breath of the country, to build a network larger than GAIL within the next couple of years. By 2010, RIL plans to ferry 80 MMSCMD of gas through its network, going up later to 120 MMSCMD if the D-6 discovery is found to be bigger than what it is today. This is more gas than what has ever been ferried by GAIL. Not to be left behind, GAIL has also proposed pipeline networks based on the Dabhol and Kochi LNG terminals. The HBJ pipeline is to be upgraded and feeder lines built to feed more gas from Dabol and Dahej terminals. But, unlike in the case of RIL, GAIL's new pipeline network is built on LNG rather than domestic gas as feedstock. There is one major imponderable in GAIL's gameplan: projections show India could become a gas surplus country by 2011-12, riding on the gas discoveries in the East Coast of India.

This, of course, may have one adverse spin-off: LNG imports may just become unviable. Former Director General Hydrocarbons Avinash Chandra has said that there is as much as 150 Trillion Cubic Feet of Gas waiting to be tapped on India's East coast. That is a lot of gas, by any yardstick. Though demand is expected to go up to mop up excess supply in the long run, to bank on the LNG plants to feed GAIL's gas network has its attendant risks. GAIL is also betting on two other sources of gas -- through the Iran-India and the Myanmar-India pipelines. However, both projects are fraught with political risks and may not fructify. On the other hand, to be fair to GAIL, the situation may not be as bad as is made out to be. If indeed there is an abundant supply of gas, GAIL's network can be used to tap domestic sources, instead. In other words, the investments in a new network will not go entirely to waste; only the source of supply will change. What is more, GAIL clearly isn't putting all its eggs in one basket. It has teamed up with ONGC to ferry gas from its recent discovery -- estimated at a massive 20 tcf of gas -- in the KG Basin; and similar deals are likely from the other discoveries -- particularly of GSPC -- in the area.

Choubey's other big challenge is to ensure an orderly growth of GAIL's petrochemical and LPG businesses. The Pata complex and LNG plants along the HBJ network face the prospect of being starved of rich gas in the face of diminishing supplies from ONGC's Mumbai High field. An opportunity to derive rich gas from the Dahej terminal is frustrated by ONGC's insistence on building a C2+ extraction unit at Dahej. Choubey will have to do some smart footwork to keep his plants from running out of feedstock. His investment in the Assam Gas Cracker is dictated more by political than economic considerations. The subsidy-driven project on the foothills of the Himalayas in the remote North East is based on an IRR of 10% on the basis of a set of optimistic assumptions. The project has the capacity of bleeding GAIL if any of these assumptions turn out to be incorrect. The Dabhol LNG project, fraught as it is by cost and time overrun, on top of an uncertain LNG market, looks equally dicey. As it happens, the petroleum ministry would have wanted GAIL and fellow public sector marketing companies to create monopoly city gas distribution projects around the country. But this paradigm is being challenged by proactive state governments which refuse to acknowledge the central government monopoly over gas legislations, despite a Supreme Court judgement in the Centre's favour. It is now a certainty that private companies will become important players and competitors to GAIL in city gas projects.

By virtue of his long association with GAIL, Choubey no doubt is acutely aware of the challenges facing GAIL today. A cause for worry is the growing trickle of employees migrating to more lucrative jobs offered by his competitors. This is irreplaceable talent nurtured carefully by GAIL over the decades. His managerial skills are likely to be sorely tested by his ability to stem this growing tide of talent migrating to greener pastures.

The big advantage that Choubey possesses is the support he enjoys within the rank and file of the company. Besides, his interaction with the outside universe is not something that he will have to learn through a process of trail and error. Mandarins at Shastri Bhavan have interacted closely with him while he was the marketing director. He enjoys their grudging respect for his ability to find a solution to sticky situations, particularly in pricing and the allocation of gas. He is, without doubt, a consummate negotiator and competitors respect him for his ability to drive home a hard bargain. He is also a consensus-builder, and his open albeit quiet manner of functioning, is in marked contrast to the rancorous and high-pressured operating style of his predecessor, Prashonto Banerjee.

But, more than anything else, nowhere will Choubey's marketing skills be more in demand than in the market place. For GAIL, the transition to a free market has happened all too suddenly. Learning to cope with a changed environment is always a strenuous process for any organization, and GAIL is no exception. Choubey will have to quicken the process; and do so without adverse after-effects. He has to forge stronger relationships across a wide spectrum of stakeholders -- from regulators and suppliers to purchasers of gas -- so as to ensure that GAIL continues to play a pre-eminent role in the gas market of the future. How he manages his relationship with RIL -- a formidable adversary -- will critically determine the future of GAIL. If RIL can be roped in to form a common platform to build a transmission and distribution network that reaches every nook and cranny of India, there will be enough business for everyone to benefit. Choubey will also have to use every trick in the book to convince the government to take profit gas in kind rather than in cash. This will give him a larger volume of gas to play around with. He has to move quickly to ensure that gas supplies from all non-RIL fields are ferried through his network. The GAIL chairman also has to build relationships with all and sundry to stake out a presence in every city gas distribution project. He has to find the rich gas quickly enough for his petrochemical and LPG plants. Contingency plans have to be ready to switch from LNG to domestic gas if the need arises. In case the Myanmar-India and the Iran-India pipelines fructify, GAIL has to be ready to leverage the gas to its advantage in the market.

Choubey faces multiple options. The challenges are huge but, equally, the possibilities are immense in a market which is going to grow geometrically from now on. Importantly, there is no middle ground anymore. There are just two stark scenarios facing GAIL today: GAIL can either scale the hurdles successfully, and build a monolithic enterprise by taking advantage of the opportunities in hand and leveraging its strengths. Or it can stand vanquished by its nimble-footed competitors. The buck, alas, stops with Choubey. The winds of change can either blow him away, or blow away and make him a harbinger of change!