The city gas distribution (CGD) sector is witnessing considerable expansion across both the compressed natural gas (CNG) and piped natural gas (PNG) segments. In light of this, CGD players are planning to invest further in the sector. However, to facilitate growth, challenges such as low returns on investments, lack of appropriate tariffs and financial viability concerns need to be resolved. Industry experts comment on the state of the sector and its future outlook…
How has the company’s performance been in the past year and what are your future plans?
We expect to maintain 7-8 per cent growth in volume sales in the current year. While 70 per cent of our volume sales come from CNG, PNG and industrial sales together account for 30 per cent of the total sales volume. Of these, the CNG segment is growing at a much faster rate. At the same time, the PNG segment has received a push from the government, with a target to provide another 10 million PNG connections over the next three years.
Currently, Mahanagar Gas Limited (MGL) operates 193 CNG stations in Mumbai and its adjoining areas. Going forward, it plans to increase its capacity by adding 15 to 20 CNG stations on average each year. MGL has 900,000 PNG connections and plans to add another 135,000 connections this year. Further, in the coming years, the company plans to add 150,000 connections annually. In terms of sourcing options, about 15 per cent of the company’s gas requirements are met through regasified liquefied natural gas (R-LNG).
While the company usually undertakes a capex of about Rs 2 billion each year, this year, an estimated Rs 2.5 billion will be spent as capex. This figure is expected to rise to Rs 3 billion annually in the future. The focus areas for such capex will be the new geographical area in Raigarh where 20 new CNG stations and a steel pipeline network will be set up. Further, MGL has seen an increase in its profits this year over 2015.
While Gujarat Gas Limited (GGL) usually witnesses a year-on-year growth of 8-10 per cent, of late, the growth has been stagnant. However, the CNG segment specifically has continued to maintain a growth rate of 8-9 per cent per annum.
There has been a conscious effort on the company’s part to add more CNG/PNG connections as compared to industrial connections. Earlier, indus-tries used to account for an 80 per cent share in sales while CNG/PNG connections accounted for only 20 per cent sales. However, the split has been constantly improving in favour of CNG/PNG connections. While in 2015 the ratio of industries to CNG/PNG connections was 70:30, this year it is estimated to be 64:36. Going forward, the company expects to serve both the markets in equal proportion.
At present, GGL serves about 1.1 million domestic connections and operates 1,024 CNG stations. It plans to aggressively increase the number of CNG stations by adding 50-60 stations in the coming months. It also plans to add 300,000-350,000 PNG stations in the next few years. Besides, the company sources the majority of its gas (about 70 per cent) as R-LNG.
While the usual capex for GGL is Rs 4.5 billion-Rs 6 billion, the capex for 2016 is estimated at Rs 8 billion-Rs 9 billion since the company plans to fast-track some of its projects. The focus of such capex will be on network expansion. Moreover, the company has made profits of about Rs 700 million in the first quarter of 2016, as compared to Rs 1.54 billion last year.
Adani Gas Limited (AGL) uses about 1.2 million cubic metres of gas for its operations, of which over 400,000 units (or one-third) is sourced as R-LNG. Almost 60 per cent of the gas sourced is provided to CNG consumers. At present, the company serves about 100,000 domestic and 350,000-400,000 industrial consumers. Besides, it operates 65 CNG stations (45 in Ahmedabad, 13 in Faridabad, 6 in Vadodara and 1 in Khurja), and it plans to add another seven stations in 2016. While the company’s CNG sales have seen an increase over the years, industrial sales have dropped. This decline can be largely attributed to falling international oil prices.
With regard to PNG connections, AGL currently serves around 260,000 domestic consumers, and has the infrastructure to serve another 800,000 consumers. However, consumers are not willing to shift to PNG. As in the past, the company will spend an estimated Rs 1.5 billion as capital expenditure this year.
What are the key issues and challenges faced by CGD players?
While sourcing of gas does not pose a problem for CGD players, several operational issues plague the sector. Difficulties in receiving clearances, operational challenges during monsoons, land availability constraints and lack of skilled manpower tend to slow down project implementation. In the long run, there is a need to rationalise tariff bids. At the same time, the regulator needs to ensure that the industry earns adequate returns. Other stakeholders such as local governments and municipalities need to be brought on board so as to lower the taxes levied on CGD developers. Only then can growth in the sector be sustained.
One of the biggest challenges in the sector today is procurement of technology that is reasonably priced and adaptable. There is also a lack of manpower. However, for GGL, procurement of land does not pose an issue. Most of the company’s operations are in Tier II or Tier III cities, where access to land is relatively easy.
The industry continues to suffer from inefficiencies in gas supply. While the costs of providing connections are high, the regulatory board has fixed the cost that is passed on to consumers at Rs 5,000 per connection. Not only is this price too low, it is also refundable. Therefore, the provision of new connections is not financially viable for CGD companies. Furthermore, marketing gas proves to be a difficult task given the ease and convenience with which consumers can avail of cylinder supplies. Moreover, the payments that CGD companies are required to make to municipal corporations leave no room for the distributor to make profits. Almost 50 per cent of the capex undertaken by CGD firms is passed on to the municipal corporations. Furthermore, 10-15 per cent of the operational expenditure is passed on to the civic agencies in the form of lease rent and property taxes.
What are the future prospects of the sector?
The policy environment is conducive to the growth of the sector. The focus of the government on making cleaner fuels available is a step in the right direction. Going forward, one expects to witness more PNG connections in the sector. Further, the industry does not foresee any competition to the incumbents in the immediate future.
The industry expects to witness serious bidding in the upcoming eighth round of bidding. The regulator needs to ensure appropriate tariffs and adequate returns on developers’ investments. The centre’s focus on CGD, for instance through the Gas for India campaign, is welcome.
While the optimism in the sector is high, a sense of caution needs to be maintained while assessing the future prospects.