Network Expansion

Opportunities and challenges in CGD infrastructure development

The city gas distribution (CGD) sector has shown mixed progress over the past few years, with an increase in the number of geographical areas (GAs) bid out in the fifth and sixth rounds. However, the number of GAs rec-

eiving just one bid or no bid at all has increased. Nevertheless, CGD entities in the country appear to be positive about the sector’s prospects. The key growth drivers for the sector are a renewed focus on environment-friendly practices, a conducive policy framework and high priority being accorded to it in terms of gas allocation for domestic consumption.

At a recent conference on CGD in India, organised by India Infrastructure, leading developers spoke about the performance of the sector, the major issues it faces and their expectations from the government. Excerpts…

Ravi Agarwal
Managing Director, Rajasthan State Gas Limited
(Kota CGD Network, Rajasthan)

At present, the Kota GA is being managed by a joint venture (JV) of GAIL Gas Limited and Rajasthan State Gas Limited, with the former holding 50 per cent stake. The CGD network which is now being established is significantly different from the earlier one. A major factor driving the change is the adoption of innovative methods and techniques in establishing the network.

In any particular GA, performance is dependent on the level of government support, followed by planning (marketing) strategies and efficiency achieved by a company at the operating stage. However, whenever a GA is allotted to a particular CGD entity, the planning and marketing strategies are not synchronised with the pipelines being laid and the marketing clusters being developed. This leads to the establishment of a vast pipeline network without commensurate development of a market ready to exploit the infrastructure, thereby adversely affecting profitability. A similar situation exists in Kota where the company is facing low demand for gas connections from the domestic, industrial and commercial segments. To overcome this, it has developed an aggressive plan to increase the number of connections. In the adjoining areas of Kota, the company plans to develop CGD infrastructure in identified industrial clusters. Besides, it is constructing a compressed natural gas (CNG) station on the Kota-Tonk-Jaipur highway.

At present, a 55 km network has been established, which will be increased by 15 km next year. However, only 55 km will be operationalised. Moreover, the company is targeting 6,000 household connections and plans to set up three CNG stations in the coming year. It will provide total CGD solutions in four smart cities in Rajasthan – Ajmer, Jaipur, Kota and Udaipur. Further, the Rajasthan government has identified areas adjoining the GAs (smart city GAs) for CGD development. However, the expansion of a CGD network in Tier II cities is less economical than in Tier I cities. Therefore, a mix of industrial and domestic demand is needed to drive CGD network expansion in these cities.

The company is focusing on the industrial segment for business expansion. At present, about 70 per cent of the business comes from the CNG segment and the remaining through the domestic segment. The gas being sourced from GAIL (India) Limited is a combination of 60 per cent imported regasified liquefied natural gas (R-LNG) and 40 per cent domestic gas. The company expects operational profits in the range of Rs 50 million-Rs 60 million from the third year of operations. The capex is estimated at Rs 2.4 billion.

Bashit Dholakia
Director, Indian Oil-Adani Gas Private Limited
(Dharwad CGD Network, Ernakulam district, Kerala)

Indian Oil-Adani Gas Private Limited has successfully established CGD networks in seven GAs, covering eight to nine districts. Currently, the company meets 50-55 per cent of its gas needs from R-LNG and the remaining from domestic gas.

With respect to the work plan stipulated by the Petroleum and Natural Gas Regulatory Board, the company is targeting the laying of over 600 km of steel pipelines and setting up over 70 CNG stations by 2017. An investment of more than Rs 16 billion has been earmarked for the same.

In terms of the number of household connections, the company hopes to add about 25,000 connections in every district over the next four to five years, which translates into approximately 200,000 connections. The company does not expect to generate profits in the first two to three years, as there will be significant outgo in laying the pipeline infrastructure. However, profits are expected to be generated from the fourth or fifth year onwards.

The company is facing a number of issues in the development of CGD infrastructure, a key problem being the non-uniform charges/tariffs imposed by local authorities. At present, the charges range from Rs 3,000 to Rs 10,000 per metre. This needs to be standardised across regions and, therefore, requires intervention by both the central and state governments. Moreover, there is a need to revamp the existing bidding procedure, which has not been able to generate significant interest among developers. Given that CGD network development is also part of the country’s overall infrastructure development, a more holistic view needs to be taken on the sector’s investment requirement.

R.K. Goel
Chief Financial Officer, Mahesh Gas Limited
(Pune, Maharashtra)

Mahesh Gas Limited was incorporated in 2015 and is currently developing CGD infrastructure in Pune. The major industrial areas in the district are Baramati, Jejuri, Talegaon and Ranjangaon. In addition, the company expects to tap the industrial gas segment in Lonavla, Lavasa and Aamby Valley. Plans are afoot to set up at least 20 CNG stations in two phases over a period of five years. However, a major problem being faced by the company is that of inadequate pipeline connectivity. The company is in talks with the Reliance Group, GAIL (India) Limited and other companies for addressing the issue. Allocation of sites by the Maharashtra Industrial Development Corporation is another issue that is expected to be resolved in a couple of months.

Apart from CNG stations, the company is targeting 52,000 household connections in the next five years. Of these, 3,500 connections are expected to be provided in the first year. For the first five years, a total of 1 million metric standard cubic metres per day of gas is expected to be distributed to the industrial, commercial and domestic segments. In terms of actual consumption, the highest demand is expected to come from the industrial sector (50 per cent), followed by the commercial sector (30 per cent) and the domestic and transportation sectors (10 per cent each). Within the industrial segment, the maximum demand is expected from the automobile and electrical industries.

Based on the experience so far, the company is looking for opportunities in other GAs as well. In the recent bidding process, the company bid for six cities, and it was the sole bidder for Ahmednagar. Overall, it hopes to win three to four cities in the northern and western parts of the country. Its capex is around Rs 6.4 billion. The company has maintained tariff rates for the industrial segment at competitive levels. From fiscal year 2017-18, the company expects to reach positive profit levels and expects a profit of about Rs 5 billion in 2018-19.

To improve profit margins, it is important to devise a strategic investment plan, duly synchronised with the development of smart cities. It is also important that adequate infrastructure is created, tariff rates are made competitive and resources mobilised from domestic and international sources.

GET ACCESS TO OUR ARTICLES

Enter your email address