Petroleum Board Draft Regulations Pose Challenges For Petronet LNG's Pricing Strategy

The draft regulations released by the Petroleum and Natural Gas Regulatory Board on Wednesday propose to extend oversight to liquified natural gas terminals, aiming to enhance regulatory control over their operations.

These terminals have previously operated without significant regulation. The draft aims to bolster oversight, potentially impacting existing players while promoting sector transparency.

• An entity currently operating an LNG terminal, planning to expand or set up a new terminal will have to submit a registration application to the board.

• Application has to be submitted with details, like a feasibility report, gas evacuation plans and a detailed business plan.

• Entities will also have to submit a "performance bank guarantee", which amounts to either 1% of the project cost or Rs 25 crore, whatever is lower.

• The board will issue a certification of registration after evaluation of the submitted documents, allowing companies to start and carry on activities.

• Certificate has to be valid for 30 years from the date of commissioning or date of registration, whichever is earlier. Registration has to be extendable in blocks of 10 years.

• Board to also approve the completion schedule of the LNG terminal and monitor its progress. The board may impose penalties if an entity fails to meet timelines, or other requirements.

• Operating entities will also need to publicly disclose their regasification tariffs and other charges.

Established to develop, construct, and operate Liquefied Natural Gas import and regasification terminals in India, Petronet LNG Ltd. operates two terminals in Dahej, Gujarat and Kochi, Kerala, with a greenfield project underway in Gopalpur, Odisha.

These terminals are crucial for converting imported LNG into usable gas for distribution via pipelines, with Petronet handling a significant portion of India's imports, serving around 33% of the domestic gas market.

The company operates two regasification terminals at Dahej, Gujarat and Kochi, Kerala. It is also implementing a greenfield project—Gopalpur Terminal. This project on the east coast of Odisha would take three years to complete.

As per the company's annual report for the financial year-ended March 2023, it handles about 75% of India's LNG imports and caters to about 33% of gas supplies in India.

Pricing Power Erosion: The draft regulations may constrain Petronet LNG's ability to adjust regasification tariffs, potentially reducing its pricing power, according to Citi. Presently, the company can annually increase tariffs by 5%, a privilege that could be challenged with increased regulatory transparency, Citi said.

Intensified Competition: Streamlined entry processes could invite new competitors into the LNG terminal market, heightening competition for Petronet LNG, potentially pressuring them to lower prices to maintain market share.

Heightened Scrutiny and Costs: Stringent application requirements and renewal procedures could escalate administrative burdens and costs for existing players like Petronet LNG, impeding operational efficiency.

Regulatory Standardisation: A cohesive regulatory framework could foster transparency and stability in India's LNG terminal sector, attracting new investments and players, indirectly benefiting Petronet LNG.

Operational Efficiency: Regulations may prompt Petronet LNG to streamline operations, enhancing cost efficiency and bolstering long-term margins even amidst increased market competition.

Petronet LNG recently extended its key LNG supply agreement with Qatar Energy, securing 7.5 million metric tonnes annually until 2028, with GAIL (India) Ltd., Indian Oil Corp., and Bharat Petroleum Corp. as offtakers.

Potential regulatory oversight could empower these offtakers during contract negotiations, potentially reducing Petronet LNG's regasification service margins, as suggested by Citi analysts.