Gail earmarks $2.7 bn to take on Reliance

Gail (India), the country's biggest natural gas distributor, will spend $2.7 billion expanding its pipeline network by two-thirds as Reliance Industries prepares to enter the market.

State-owned Gail will spend the most in the next five years to add 4,000 kilometres (2,486 miles) to its 6,000-kilometre pipeline network by 2012, Chairman U D Choubey said in an interview yesterday.

Reliance Chairman Mukesh Ambani plans to build pipelines to transport gas from the company's fields starting 2009, threatening Gail's near monopoly. The distributor's 90 per cent share of the market was secured because output was mainly restricted to state-owned companies until 1999.

"A lot of companies are developing gas fields,'' said R K Gupta, who manages $70 million in equities at Credit Capital Asset Management in New Delhi. "GAIL offers an advantage because it has an existing network and connections already established with the consumers. This is the best option left for the company.''

Ambani on January 12 announced plans to spend $15 billion on building plants to turn coal and lignite into gas and lay pipelines to supply the fuel to homes in the western state of Gujarat.

Reliance's 2002 gas discovery at the Krishna Godavari basin off India's east coast may total as much as 35 trillion cubic feet, drilling partner Canada's Niko Resources said November 1. That day, Reliance said it plans to invest $5.2 billion to produce 80 million cubic meters a day starting in 2009. That will double India's current gas output.

GAIL will approach Reliance Industries, Cairn Energy and Gujarat State Petroleum Corporation, which also have gas fields in the Krishna Godavari basin, or KG Basin, for distribution contracts, Choubey said.

"All eyes are set on the KG basin. Our aim will be to try and tie up gas produced from sources belonging to Reliance, Cairn or Gujarat State,'' Choubey said. "We would like to transmit their gas.''

Chevron Corporation, the second-largest US oil company, which has a 5 per cent stake in a unit of Reliance, may join the Indian company in setting up a gas distribution network across the country, Business Standard had reported on May 4, citing a letter written to the oil ministry.

The New Delhi-based distributor plans to build pipelines to connect new fields to consumption centres, Choubey said. It will also connect to liquefied natural gas terminals being built and expanded in western and southern India.

"We are moving from a simple and a homogenous business environment, wherein there was one producer and one distributor, to one that is complex and heterogeneous,'' said Choubey, who was appointed as the chairman on February 1. "My biggest concern is to continue to be a dominant player in the new scenario,'' he added

GAIL's shares rose 1.9 per cent to Rs 282.75 in the past year, trailing a 40 per cent increase in the Bombay Stock Exchange's benchmark index, partly because the company's profit is reduced by government orders to state energy companies to cap fuel prices and contain inflation.

Reliance Industries' shares have doubled in the past 12 months to Rs 1,406.15 at close yesterday.