The city gas distribution (CGD) segment has witnessed remarkable growth over the past year. The existing players have invested significantly in developing infrastructure and expanding operations to new geographical areas (GAs)/markets. The Petroleum and Natural Gas Regulatory Board has also taken several initiatives to provide a favourable business environment to CGD entities. However, the Covid-19 pandemic has impeded the roll-out of CGD projects due to labour availability issues and delays in getting approvals. With regard to gas demand, the CGD segment is expected to gradually limp back to normal in the near term. At a recent India Infrastructure conference, a panel of key CGD operators discussed the impact of the Covid-19 pandemic on their operations, mitigation measures adopted in response to the pandemic and the future outlook for the sector. Excerpts…
Currently, Indraprastha Gas Limited (IGL) has 10 operational GAs. Its CGD network comprises a total of 550 compressed natural gas (CNG) stations and 1.6 million piped natural gas (PNG) connections.
The outbreak of the Covid-19 pandemic affected the operations of the company as gas sales volumes dropped from 6.4 mmscmd to 5.5 mmscmd. The pandemic has also led people to switch to self-driven cars, and CNG cars have emerged as the most economically viable option as they facilitate 50-60 per cent savings. As the unlock process has resulted in some demand revival, although gradual, CNG sales volumes have increased. CGD gas sales are expected to surpass the previous year’s level by the end of the current fiscal.
IGL plans to invest Rs 12 billion-Rs 15 billion every year for the next five years and is not planning to cut down its capex as mandated by the government. IGL is also working towards diversifying its sources of equipment procurement and has formulated a new policy for awarding pilot orders to new vendors. By doing this, it aims to make sure that quality and safety are not compromised. Pre-Covid, IGL relied heavily on imports from China. However, recently, the government has placed certain restrictions on such imports and the company is now looking to approach Indian vendors, thereby promoting the Make in India initiative.
Since CGD companies are highly dependent on ancillary industries, IGL also has a vendor development department, which provides technical support to vendors for setting up dispensers, compressors and meters. The CGD entity ensures that vendors have a clear technical support requirement and they give high weightage to the quality of the equipment.
Sabarmati Gas Limited (SGL) currently has a presence in 25 of the 33 districts of Gujarat, with 1.65 million PNG connections and 514 stations. The company also has a significant presence in rural areas. It provides PNG connections to 108,000 customers in over 1,200 villages. While SGL has major operations in Gujarat, it has also set up GAs in states like Punjab, Madhya Pradesh and Maharashtra.
SGL was affected by the Covid-19 pandemic as its construction activities came to a complete halt during the nationwide lockdown. With the recent ease in restrictions, volumes have reached 80-85 per cent of the pre-Covid level and construction activities have also picked up pace. The company is now hopeful of achieving its 2020-21 target of providing 225,000 PNG connections and setting up 175 CNG stations. It has proposed a capex of Rs 9.5 billion for the current financial year.
Further, the CGD entity is striving to achieve technological advancements in various areas of operations, with a special emphasis on establishing a digital payment system. The ongoing pandemic situation and general transparency requirements have made digitalisation an important aspect in operations. In a bid to promote digital transactions, SGL implemented the spot billing system, under which a barcode is scanned to make the payment. Another technological upgradation SGL is extensively working on is the widespread installation of smart meters. The company has already implemented smart metering for industrial customers and is now considering bringing all commercial consumers into the ambit as well.
Adani Gas Limited (AGL), as a stand-alone company, has 19 GAs and another 19 GAs in a joint venture with Indian Oil Corporation. Of the 19 GAs owned by Adani Gas, 14 are currently operational. The group currently runs CGD networks in Ahmedabad, Vadodara, Faridabad and Khurja and has won rights to set up CGD networks in 13 other cities in India. AGL’s network comprises an over 6,000 km pipeline and 70 CNG stations catering to more than 315,000 households, 1,250 industrial units and 2,400 commercial units. The ongoing pandemic has had an adverse impact on AGL’s operations as sales volumes went down by almost 60 per cent, construction activities came to a complete halt in three of the 16 GAs and gas sales volumes also dropped from 1.94 mmscmd to 1.6 mmscmd. However, AGL was quick to cope with the situation and is currently operating at pre-Covid levels in northern India, with overall operations being 80-85 per cent. The company has set a target of increasing its number of CNG stations from 121 to 200 during 2020-21 and is optimistic about achieving it.
At the same time, the prevailing situation has posed certain challenges in procuring equipment. However, AGL has ensured that the supply chain does not suffer by placing orders well in advance. It recognises the importance of ancillary industries in the CGD sector and has a vendor development team that approaches budding entrepreneurs. The company is willing to provide technical support to upcoming vendors and even place pilot orders with them to facilitate more competition in the equipment supply segment.
Challenges faced by the industry
The CGD industry faces various challenges that must be addressed in order to drive growth. Key among these are shortage of skilled labour, difficulties in equipment procurement and delays in obtaining permissions from local agencies. All these issues and challenges have become even more critical due to the pandemic and require immediate attention of the government and regulators.
The sector is highly dependent on migrant labour for construction activities and the unavailability of labour poses a major challenge. The nationwide lockdown has led to a migrant labour crisis and bringing them back to the construction sites would be extremely difficult for CGD entities. Supply chains have also faced disruptions because of the pandemic as well as the change in government policies regarding trade with neighbouring countries. The bulk of imports coming from China earlier, could now face restrictions, leading to delays in procuring the necessary equipment. Many entities also believe that this situation could be used as an opportunity to diversify procurement sources and give an impetus to the Atmanirbhar Bharat initiative.
Reforms in market exclusivity are an issue of grave concern for the existing entities as they believe that such reforms could pose a threat to the incumbent players. The existing entities have invested significantly in developing the infrastructure and they believe that allowing new entrants to set up CNG stations in areas with a large consumer base would give them an unfair advantage. There is common consensus among existing entities that regulatory authorities should not only keep consumers’ interests in mind, but the interests of entities should also be taken into consideration while rolling out any reforms pertaining to market exclusivity. However, some CGD companies also see this reform as an opportunity, as it could enable them to expand their existing GAs and tap new markets. Another challenge for the CGD sector that has surfaced during the pandemic is difficulty in obtaining permissions physically from approval agencies. The lockdown has led to delays in obtaining requisite permissions in areas where online facilities are not available. However, CGD companies believe that these are not intentional delays and the local bodies are only restricted due to the prevailing pandemic situation.
The way forward
The CGD sector is currently in a positive phase. The government has placed special emphasis on the CGD sector, which has been evident in the success of the ninth and tenth CGD bidding rounds. It is also working towards providing every household with a PNG connection and ensuring that a large fleet of vehicles in the country is run on CNG. The sentiment of 46 entities currently operating in this sector is also positive despite the pandemic, as most of them are willing to increase investments in building infrastructure and penetrating new markets. Through collective initiatives of all the stakeholders, the sector is expected to double its current share of 32 mmscmd in the total natural gas demand in the next four to five years.