The development of India’s city gas distribution (CGD) network is dependent on domestic gas availability and the pace at which the Petroleum and Natural Gas Regulatory Board (PNGRB) awards licences and authorisations. Recently, the PNGRB invited bids for CGD retailing licences in 34 cities in Madhya Pradesh, Gujarat, Maharashtra, Uttar Pradesh, Karnataka, Haryana, Punjab and Goa. This will be the sixth bidding round the PNGRB has conducted for awarding CGD licences.
In India, CGD networks are awarded via a competitive bidding process while keeping in mind all technical and financial parameters. The bid evaluation criteria include factors like network rate, inch km of steel pipelines, the number of domestic connections in the first five years, and compression charges from the sixth to the 25th year. The bidding criteria are amended from time to time on the basis of the experience gained through previous bidding rounds.
Changing licensing regime
The licensing regime pertaining to bidding rounds has been changing. From Round 1 to Round 3, bids were awarded to companies that quoted the highest composite scores. Bidders were asked to submit a feasibility report along with their bids as they were quoting high numbers of piped natural gas (PNG) domestic connections in the first and second rounds with near-zero bidding tariffs. In addition, there was a stipulation that variations between figures in the feasibility report and actually quoted figures should not be more than +/-20 per cent.
However, in the fourth round it was proposed that the variation in the proposed network tariff and the compression charge between any two consecutive years should not be more than 10 per cent. A minimum work programme was also prescribed for the first five years, with the PNGRB being assigned the task of stipulating its terms with regard to the inch km to be laid and the number of domestic consumers to be connected in the first five years. In Round 4, firms had bid extremely low network and compensation charges. Consequently, it was decided to accord a 70 per cent weightage to the lowness of the present value of the overall unit network tariff (Rs per million British thermal units) over the economic life of the network project (25 years), and 30 per cent weightage to the lowness of the present value of the compression charge (Rs per kg) for dispensing compressed natural gas (CNG) at CNG stations over the economic life of a network project.
Current status of licence awards
Networks have been established in all the six geographical areas (GAs) that were offered in the first CGD round. Meanwhile, the fate of the Shahdol, Rajahmundry, and Yanam GAs offered in the second bidding round is still unknown as the winning entity, Reliance Gas, sought to opt out of laying pipelines in these cities. The PNGRB plans to put them up for auction again.
Authorisation certificates have been awarded for six out of eight GAs offered in the third bidding round. While gas supply operations have commenced in Jamnagar, CGD networks in Bhavnagar and Kutch (West) are under development. Though Panipat was part of the bidding process, the associated GA was withdrawn to modify its boundaries as per the Haryana government’s orders.
Fresh bids were invited for the fourth CGD round in October 2013 after the process was cancelled in November 2011. There was aggressive bidding in this round, particularly for cities like Bengaluru and Ernakulam, which registered zero bids. In these cases, the winners were decided on the basis of the large performance bonds that were submitted. In contrast, no bids were received for Ranga Reddy and Medak, Nalgonda, Khammam, Shahjahanpur and Guna. So far, the PNGRB has received a total of 44 bids for granting authorisation to the development of CGD infrastructure in nine locations. These regions are Ernakulam, Bengaluru, Raigad, Pune, Thane, Panipat, Amritsar, Daman, and Dadra & Nagar Haveli. The related authorisation certificates have been sanctioned.
In February 2015, the PNGRB invited bids for issuing licences for retailing CNG and piped cooking gas in 20 cities. In this round, eight cities did not receive any bids while two received single bids. The status remained unchanged even after extending the bid deadlines. Consequently, in July 2015, the PNGRB stated its plans to invite fresh bids for GAs that received no bids or only single bids.
Recently, the PNGRB announced the sixth bidding round for offering CGD licences for 34 cities, with the last date being December 14, 2015.
Further CGD opportunities
The key factors determining a CGD project’s investment requirements are geographical area, demand composition, and penetration in terms of domestic connections. While PNG infrastructure accounts for approximately 70 per cent of a CGD project’s capex, CNG infrastructure makes up the remaining 30 per cent.
Three GAs under Round 2 – Rajahmundry, Shahdol and Yanam – are yet to be awarded. While Shahdol was reoffered in the sixth round, Yanam will be reoffered after the sixth round is completed. The combined estimated CGD de-mand in these areas is 0.7839 million metric standard cubic metres per day (mmscmd), which is expected to increase to 2.16 mmscmd by 2020. In Round 3, only one GA is yet to be awarded. This is Asansol-Durgapur, where the current demand for CGD is 1.2 mmscmd, which is projected to increase to 2.4 mmscmd by 2020. A high concentration of industrial consumers in the demand mix and close proximity to coal bed methane gas sources makes this an attractive CGD market. The remaining five GAs in the fourth bidding round also present a potential market for CGD companies in the short run. The total authorised area for laying, building, operating and expanding the CGD network in these five areas is in excess of 56,800 square km with 3.7 million households to be served.
The cities that did not receive bids in the fifth round occupy an area in excess of 58,000 square km and have a combined population of over 26 million.
As per India Infrastructure Research, the max-imum number of CGD projects has been planned for Uttar Pradesh (with 16 GAs yet to be awarded), followed by Maharashtra and Karnataka. The majority of the cities to be auctioned for bidding in the future are Tier II and Tier III cities. This implies a significant business opportunity for project developers, pipeline manufacturers, technology providers, meter manufacturers, etc.
The decline in gas prices is likely to have a positive impact on CGD oper-ations as CNG and PNG could become more competitive in comparison with diesel and li-quefied petroleum gas. The introduction of amendments in the bidding procedure is expected to ensure that there are no irrational bids, thus encouraging greater participation and the expansion of the CGD network.