Gas Outlook: CGD operators’ perspective

CGD operators’ perspective

The city gas distribution (CGD) segment accounts for about 10 per cent of the country’s total gas consumption. Although the segment witnessed high growth rates following the establishment of the Petroleum and Natural Gas Regulatory Board (PNGRB) in 2003, it has registered a slowdown in the past two years. The CGD segment recorded a growth of 64 per cent in 2010 as compared to 2009. In 2011, it witnessed 47.5 per cent growth and the total pipeline network length stood at 26,550 km. The growth in the segment declined to as low as 0.6 per cent in 2012.

At present, the country’s CGD network of 26,696 km is spread unevenly. It covers the states of Gujarat, Maharashtra and Rajasthan in the west; Delhi, Haryana and Uttar Pradesh in the north; Tripura and West Bengal in the east; Madhya Pradesh in central India; and Andhra Pradesh in the south. With natural gas pipeline infrastructure connecting the southern and eastern parts to supply sources, the scenario is likely to improve.

However, over the past two years, the segment has faced several challenges. The country’s declining domestic gas production, especially from the Krishna-Godavari-D6 block, had reduced gas availability for CGD operators, thereby increasing their reliance on expensive liquefied natural gas (LNG) imports. The segment also suffered on account of being accorded lower priority than the power and fertiliser sectors for gas allocation. Moreover, since most of the current capacities of LNG terminals were already contracted, private players and new entrants faced challenges in catering to their customers in the absence of an alternative source of gas. In addition, the regulatory uncertainty related to the bidding process for the CGD network disincentivised investors.

However, from mid-2013 CGD activities have gained momentum with the PNGRB reinitiating the process of awarding CGD licences after a hiatus of three years. It issued a much-needed policy amendment in June 2013, revising the bidding criteria for laying, building, operating or expanding the CGD network.

It was specified that the weightage of network tariffs and compression charges in the bid evaluation process would be increased to 70 per cent and 30 per cent respectively from 40 per cent and 10 per cent previously. In addition, the variation in the proposed network tariff and the compression charge between two consecutive years should not exceed 10 per cent. While no weightage has been given to the parameters related to the inch km of pipeline to be laid and the number of domestic connections to be provided, the PNGRB will specify the minimum work programme for both these parameters in the first five years of operation.

A change in the bidding criteria has led to the resumption of award of licences for the third bidding round. Also, efforts have been made to resume the CGD licensing process for the fourth bidding round (which was cancelled in November 2011). In October 2013, the PNGRB invited bids for 14 geographical areas (GAs). The regulator also plans to complete issuing licences for the remaining six GAs that were awarded under the third bidding round.

In another positive development for the CGD segment, the government has recently notified that the compressed natural gas (CNG) and piped natural gas (PNG) requirements of existing CGD companies should be met through domestic gas sources. Moreover, policy guidelines for new CGD entities are expected to be issued soon. The petroleum ministry has also clarified that deemed authorised entities do not require authorisation from the PNGRB for setting up CNG stations and laying spur lines in their GAs.

Smart Utilities presents the views of senior officials from key CGD companies on the recent developments and challenges in the segment and the road ahead…

P.P.G. Sarma, Chief Executive Officer, GSPC Gas

There are 2.5 million domestic gas consumers in India, of which Gujarat accounts for 50 per cent with seven CGD players operating in the state. Further, of the total 1,000 CNG stations in India, 70 per cent are located in Gujarat. The rapid development of the state’s CGD network was facilitated by the availability of adequate infrastructure and its proximity to gas supply sources.

According to GSPC, though the market has shown reasonable interest in consuming high-priced gas. If the recommendations of the Rangarajan Committee are accepted, domestic gas will be priced at around $8.4 per million metric British thermal units (mmBtu). Therefore, as domestic and imported gas prices move towards convergence, a higher level of acceptability for LNG imports is expected.

The new scheme for 100 per cent domestic gas allocation for CNG and PNG has led to a downward revision in prices. CNG prices in Gujarat have come down from Rs 60-Rs 70 per kg to Rs 44-Rs 47 per kg. However, CGD operators should not entirely depend on domestic gas and must ensure that regasified liquefied natual gas (R-LNG) continues to remain a viable option for meeting the segment’s demand.  This will help in the expansion of business opportunities in the CGD space.

The need of the hour for the CGD market is to increase its acceptability of LNG as a gas sourcing option. In fact, most players are already considering operating CGD systems on R-LNG as domestic gas is no longer a credible source, which was the case a couple of years ago. Consequently, there is a growing focus on LNG and most of the existing LNG players are ramping up their capacities while new players are trying to operationalise their facilities.

Meanwhile, the lack of clarity on downstream regulations could impact the expansion plans of existing operators or the planned initiatives of new entrants. However, over the past few months, the segment has witnessed some positive developments on the regulatory front, such as expediting approvals and initiating new bidding rounds, which will facilitate development of the downstream gas segment. These developments are expected to reduce the gap between midstream (gas transmission) and downstream (end-consumer) connectivity. In order to ensure timely project implementation, there is a need to align project-related activities including production, transmission, distribution and consumption. Although the regulator has provided clarity on tariff fixation, there are uncertainties with regard to bidding processes, which may impact last mile connectivity.

One of the major operational challenges faced by GSPC is ensuring public safety. The current regulation stipulates that gas cylinders should be retested in order to detect wear and tear, and leakages once every five years. However, there is a very low level of awareness among consumers about safety regulations. Therefore, there is an urgent need for all stakeholders including oil marketing companies, transport agencies issuing fitness certificates for cylinders and CGD operators to work together to ensure safe operations.

Raman Chaddha, Chief Operating Officer, GAIL Gas Limited

The CGD space has gained significant momentum over the last few years, driven primarily by factors such as huge demand for transportation and domestic usage, expansion of gas transmission networks, attractive economics of natural gas vis-à-vis other fuels like petrol, diesel and liquefied petroleum gas (LPG).

There are several lucrative markets in India that are still awaiting CGD coverage. This can be ascertained from the fact that 61 of the 111 Indian cities with a population of more than 400,000 are located close to gas sources. Of these 61 cites, 28 already have CGD networks and the remaining constitute potential CGD markets. The PNGRB also plans to extend the pipeline network to over 200 cities, which would drive further growth in the segment.

In terms of the recent initiatives launched by the PNGRB, the 100 per cent domestic gas allocation scheme for CNG and PNG operators has helped GAIL Gas to tackle its capacity utilisation issues. Earlier, the company was supplying CNG at Rs 70 per kg in Tier II cities and hence faced issues related to capacity utilisation, which has now improved by 80 per cent.

Domestic gas prices are expected to double to $8.4 per mmBtu with effect from April 2014. While this would incentivise investments and increase production in the long run, the power and fertiliser sectors will be negatively impacted. However, with regard to CGD, the price hike is likely to be beneficial as it can help unlock higher domestic gas volumes for the segment.

However, with implementation of the new gas tariff ($8.4 per mmBtu), PNG prices will far exceed those of the subsidised LPG, resulting in customer unwillingness to shift from LPG to PNG. In addition, there is still lack of clarity on the September 2013 order pertaining to the setting up of CNG stations (the new ruling does not offer clarity about compression charges, marketing margins, etc.).

While the allocation of domestic gas to all CGD networks is a positive move, the immediate challenge of introducing uniform gas pricing for the segment still exists. Implementation of pooled gas pricing across the country is not a viable option, but this can be initiated in different areas. An example of such a model is the Taj Trapezium Zone, where gas prices are uniform. Thus, the solution lies in introducing a uniform pricing mechanism, which will ensure sustainability of the CGD business.

There is also a need to encourage the development of green corridors to incentivise CNG use by heavy vehicles plying on the highways. The PNGRB also needs to amend regulations regarding public safety. The current safety rules were formulated in 1947. According to these rules, gas cylinders are required to be tested and then refilled. However, these regulations are not appropriate for CNG cylinders as they are installed in cars where they cannot be inspected. Meanwhile, the weak gas supply scenario has increased the importance of extensive infrastructure. There is a need to develop large LNG import and regasification capacities at existing and upcoming terminals. However, infrastructure (LNG and/or transmission pipeline network) alone cannot guarantee successful CGD operations, there is also a need for creating an enthusiastic market.

Narendra Kumar, Managing Director, IGL

Indraprastha Gas Limited (IGL), the leading CGD operator in India, caters to the world’s largest fleet of CNG-based passenger buses. There are a number of areas that present significant growth opportunities for the CGD segment. PNGRB’s “Vision 2030, Natural Gas Infrastructure in India” report envisages that the share of natural gas in India’s energy mix would increase from 10 per cent at present to 20 per cent in 2025 and 30 per cent in 2030.

The report also projects that the demand for natural gas would increase at a compound annual growth rate of 6.8 per cent from 242.6 mmscmd in 2012-13 to 746 million standard cubic metres per day (mmscmd) in 2029-30 and the CGD segment’s contribution to this demand volume is expected to increase from 6 per cent at present to 11 per cent by 2029-30.

There are several characteristics of the Indian transport market that translate into lucrative growth opportunities for the CGD segment. These are as follows:

  • India still has a low vehicular usage level of around 117 vehicles per 1,000 persons.
  • The dependence on petrol and diesel is still around 96 per cent.
  • There exists a significant potential for converting two-wheelers to CNG mode.
  • New technologies such as those implemented in the European and American markets can be introduced for natural gas vehicles in India as well. For instance, LNG can be used as fuel in heavy duty vehicles (trucks), railway locomotives and buses.

Meanwhile, the recent government policy to allocate 100 per cent gas to meet the CNG and PNG demand in the domestic market will not only improve the sustainability prospect of the CGD segment but also provide a boost to segment expansion. However, the expected increase in the price of domestic gas to $8.4 per mmBtu from April 2014 would adversely impact the competitiveness of CNG as compared to subsidised diesel, and of PNG as compared to subsidised domestic LPG.

In terms of the challenges being faced by the segment, gas sourcing and gas market economics are key areas of concern. There is an urgent need to address the issue of escalating gas prices to ensure that gas remains competitive as compared to other fuels.

In addition, the scarcity of land for setting up CNG stations, excessive road restoration activities leading to third-party damages and limited availability of agencies for CNG cylinder testing are some of the infrastructural constraints limiting CGD growth. Other issues that need to be dealt with include regulatory uncertainty, shortage of skilled manpower and vendor development.