Upstream major GAIL (India) has signed a sales and purchase agreement (SPA) for the supply of 3.5 million tonnes per annum (MTPA) of LNG over 20 years with Sabine Pass Liquefaction, LLC, a subsidiary of Cheniere Energy Partners, L.P., USA.

According to the terms of the agreement, the LNG would be supplied from Train 4 of the Sabine Pass LNG receiving terminal located on the Sabine Pass Channel in western Cameron Parish, Louisiana and would commence operations in the year 2017. The SPA which has a term of 20 years could be further extended by ten years on mutual consent.

Based on observations, the SPA states that GAIL will pay Sabine Liquefaction on the basis of Henry Hub prices which are the US bulk market benchmark for natural gas. Currently the Henry Hub is trading at USD 3.26 per MMBTU down by almost 39% on an YTD basis. At current prices, it seems to be a favourable deal for GAIL. However, with operations slated to commence from the year 2017, the overall scenario could change considerably.

But looking at the country’s vast requirement for natural gas as a prime energy source in the long term and with the government laying strong emphasis on increasing the share of natural gas in its energy basket from 10% at present to 20% in the near future, we believe it to be a positive development for GAIL.

Further, GAIL has envisaged a robust plan to double its natural gas transmission capacity from the current 170 MMSCMD to 300 MMSCMD by 2013-14. With the outlook for domestic gas supply looking very weak owing to the troubles faced in the KG basin, it is indeed a good move on the part of GAIL to look towards potential imports to meet the high demand here. But again, given that the plans for LNG import will materialise over a period of time, one may expect GAIL to feel the pressure of underutilisation in the short to medium term.

However, the company is said to be taking certain initiatives to build captive LNG capacities in order to augment its expansion plans. As part of this initiative, GAIL has recently acquired its first shale gas assets in the USA from Carrizo Oil & Gas Inc. to enter into an unincorporated joint venture, under which GAIL has acquired a 20% interest in Carrizo’s Eagle Ford Shale acreage position. The company also seems to be scouting prospective LNG imports from Singapore.

On the financial front, the company has performed well in the September quarter with its topline and bottomline growing by a good 20% and 18% respectively. At its CMP of Rs 388.75 per share the counter is trading at 11.8x its annualised EPS of Rs 32.78. But with the subsidy burden issue looming large over the government and coupled with the rising expectations of a higher share to be borne by the upstream majors in order to compensate for OMC losses, we expect GAIL’s financials to come under pressure going forward.