The city gas distribution (CGD) segment has witnessed remarkable growth over the past year. Bidding criteria have been amended, new bidding rounds have been announced, pipeline connectivity has improved, entry barriers for new players have been removed, the exit process for operators has been simplified, and penalties have been introduced for under-performance. The Petroleum and Natural Gas Regulatory Board (PNGRB) has taken several initiatives to provide a favourable business environment to CGD entities.
GGL’s current performance and future plans
The performance of Gujarat Gas Limited (GGL) was quite impressive in the first three quarters of 2018-19. In the past, the company has set up 20-22 compressed natural gas (CNG) stations in a year. In 2017-18, GGL set a record by establishing 46 CNG stations across the country. In the first three quarters of 2018-19, the company added 40 stations to its CGD network. Another 25 stations are expected to be established by March 31, 2019, setting a new record. During 2017-18, the company also laid emphasis on the digitalisation of its business processes in order to scale up its operations in states other than Gujarat.
In 2019-20, GGL plans to set up 100 CNG stations across the country. It has identified several pilgrimage routes and business circuits in Gujarat that offer high potential for CNG projects. With regard to gas sales volumes, the company expects to record a 10 per cent year-on-year growth in its existing areas of operation. In 2017-18, the company’s average gas sales volume stood at 6.22 million metric standard cubic metres per day (mmscmd). This increased to 6.55 mmscmd in 2018-19 (till December 2018), which is below the targeted average of 7 mmscmd on account of the subdued growth in Morbi and some other areas. In the past couple of months, the company’s average gas volume has reached 6.8-6.9 mmscmd.
AGL’s performance and future plans
On November 5, 2018, Adani Gas Limited (AGL) was listed on the stock exchange. The company is the second largest CGD operator in the country in terms of market capitalisation, while it ranks fourth in terms of gas volumes. Currently, AGL has four operational areas – Ahmedabad, some portions of Vadodara, Faridabad and Khurja. It is in the process of setting up CGD infrastructure in nine geographical areas (GAs) in collaboration with Indian Oil Corporation Limited (IOCL) under a joint venture (JV), Indian Oil Adani Gas Private Limited.
In Round IX of CGD bidding, the company secured 13 GAs individually, in addition to the nine GAs won in a JV with IOCL. Of the 400 districts that have been awarded or are under bidding, AGL has roughly 50 districts. The average gas volume for the company is around 1.6 mmscmd, growing at a rate of 12-13 per cent per year. At present, AGL has 78 CNG stations and around 325,000 piped natural gas (PNG) connections.
Going forward, expanding its presence in new GAs will be a major challenge for the company. Besides developing CGD infrastructure in new GAs, AGL is planning to operationalise the GAs it has won in a JV with IOCL. In the newly secured GAs, it will add around 2.2 million PNG customers and 460 CNG stations. The JV company has made a commitment of adding 2.3 million PNG customers and 850 CNG stations over the next seven to eight years. To this end, the company has been rapidly hiring more manpower.
At present, CNG accounts for 55 per cent of AGL’s total gas volumes while PNG accounts for the remaining 45 per cent. In the coming years, CNG is expected to gain dominance with its share increasing to 60-65 per cent.
Ninth and tenth CGD bidding rounds
From an operator perspective, the response of each entity to the bidding rounds was driven by its own business and commercial objectives. The two mega bidding rounds were aimed at creating a large CGD ecosystem in the country. This is in line with the central government’s vision of providing a PNG connection to every household in the country. Given the size of GAs on offer under the recently concluded bidding rounds, it seems that the government is moving towards the creation of a regional gas distribution network.
As per the minimum work programme, three to seven CNG stations will have to be operationalised and 7 km of pipelines will need to be added on a daily basis. Synchronisation between government agencies and CGD operators will help in achieving these aggressive targets.
Proposed capex
During 2018-19, GGL incurred a capital expenditure of Rs 4 billion-Rs 5 billion. Going forward, if gas volumes grow by 10 per cent, the capital expenditure is expected to grow by 15-20 per cent. For AGL, the capital expenditure has remained in the range of Rs 2.5 billion-Rs 3 billion and is expected to remain the same in the future. In addition, a capex of around Rs 3 billion was incurred by Indian Oil Adani Gas. To meet the Round IX commitments, the company will need to invest around Rs 150 billion over the next five years. The company has been achieving financial closures with ease. It has also recently commissioned its first retail outlet under the dealer-owned dealer-operated model in Palwal.
Issues and challenges
The CGD segment continues to face challenges related to delays in obtaining permissions from different government agencies and the ease of doing business. Further, multiple levies are being imposed by the state governments. These include road opening permission charges, annual rental charges and property tax. Operators feel that the process of granting permissions needs to be replaced by a dig, reinstatement and intimation process. While the provision of pipeline connectivity will be a challenge in some GAs, AGL is confident of laying pipelines and securing gas connectivity in 9-10 GAs. Further, the shortage of skilled manpower and contractors and the limited availability of raw materials in the country pose a challenge in achieving the ambitious targets. However, the operators feel that the ninth and tenth bidding rounds have taken India’s CGD business to a different level. A number of global players are coming in and several domestic vendors are also expanding their footprint. With regard to manpower, the existing entities have a large talent pool and have been continuously adding to their bench strength. Therefore, both AGL and GGL do not see it as a major hurdle coming in the way of their expansion. While there is a perception that the domestic business is not profitable, GGL believes that operational excellence is the key to reducing costs and increasing profits in this segment. Any change in the favourable tax regime for the segment will adversely affect its profitability.
The way forward
In the next couple of years, the sector will witness consolidation with financially sound players acquiring the smaller ones. Due to the imposition of penalties, only serious and competent players will stay. Going forward, as competition stiffens, CGD companies will focus on providing better customer services at CNG retail outlets in order to improve their profit margins. n
Based on a panel discussion with Suresh Manglani, Chief Executive Officer, AGL, and Nitin Patil, Chief Executive Officer, GGL, at a recent India Infrastructure conference