Focus on New Gas: Challenges remain despite government initiatives

Challenges remain despite government initiatives

The city gas distribution (CGD) sector has shown mixed progress in the past few years. In the fifth and sixth bidding rounds, there has been an increase in the number of geographical areas (GAs) bid out. However, the number of GAs receiving just one bid or no bids at all have increased. Nevertheless, CGD entities operating in the country appear to be positive about the sector’s future prospects. Growth drivers include a renewed focus on environment-friendly practices, a conducive policy framework and the highest priority being accorded to the sector in terms of gas allocation for domestic consumption.

At a recent conference, CGD in India, organised by India Infrastructure, key developers spoke about the performance of the sector, the major issues it faces and their expectations from all levels of 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) between GAIL Gas Limited and Rajasthan State Gas Limited, with a 50 per cent stake held by the former. 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 entire network.

In any particular GA, performance is dependent on the level of government support, followed by the planning (marketing) strategies and the efficiency achieved by the company during 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 at 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 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 network spanning 55 km has been established, and this will be increased by 15 km in the next year. Of this, 55 km will be operationalised. Moreover, the company is targeting 6,000 household connections and the setting up of three CNG stations in the coming year. The company will provide total CGD solutions in the four smart cities identified for development 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 expansion of the CGD network in these cities.

In terms of business expansion, the company is focusing on the industrial segment. At present, about 70 per cent share of the business is through the CNG segment and the remaining through the domestic segment. The gas, which is being sourced from GAIL (India) Limited, is a combination of 60 per cent imported regasified liquefied natural gas (RLNG) 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)

The JV of Indian Oil Limited and Adani Gas Limited, Indian Oil-Adani Gas Private Limited, has successfully established CGD networks in seven GAs, covering eight to nine districts. At present, the company meets 50-55 per cent of its gas needs from RLNG 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 in the next four-five years. In total, this translates to roughly 200,000 connections. In the first two-three years, the company does not expect to generate profits 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, with the non-uniform charges/tariffs imposed by local authorities being the biggest. 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 overall infrastructure development in the country, a more holistic view needs to be taken on the investment requirement of the sector.

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, Maharashtra. The major industrial areas in the city are Baramati, Jejuri, Talegaon and Ranjangaon. Besides, the company expects to tap the industrial gas segment in areas such as 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 facing the company is inadequate pipeline connectivity. The company is in talks with the Reliance Group, GAIL (India) Limited and other companies for addressing the issue. In addition, allocation of sites by the Maharashtra Industrial Development Corporation is another issue which is expected to be resolved in a couple of months. So far, the company is meeting 20 per cent of its gas requirements from the domestic gas allocation and the remaining from RLNG.

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 bids, the company bid for six cities, and for Ahmednagar it was the sole bidder. Overall, the company hopes to bag three to four cities in the northern and western parts of the country. Its capex is around Rs 6.4 billion. Moreover, 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. In 2018-19, the company expects a profit of about Rs 5 billion.

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 for adequate infrastructure to be created, tariff rates made competitive and resources mobilised from domestic and international sources.