City gas distribution (CGD) entities operating in the country appear to be positive about their future prospects. The government’s intent to move to a more gas-based economy bodes well for the segment going forward, as the policy landscape is likely to be more conducive to growth. Besides, government initiatives such as aggressive targets for piped natural gas (PNG) connections, the introduction of stringent emission levels for vehicles, and the proposal to develop green corridors are well aligned with the goal of reducing the carbon footprint. Further, the political will at the centre, especially in the past few months, is encouraging. The introduction of an e-portal, faster forest clearances, easier Ministry of Road Transport and Highways guidelines, increased investor interest, and a better informed customer base are some recent developments that lend optimism to the segment.
Government impetus to propel growth
The government is targeting increasing the share of gas in the energy basket from 5-6 per cent currently to 15 per cent in the short term (by 2020) and further to the world average of 24 per cent in the long term, offering a ray of hope to operators. Besides, on the consumer front, there has been increased awareness about and demand for cleaner fuels. In light of these developments, operators believe that gas will increase in prominence in the long run, and thus the role of CGD networks and natural gas availability to retail customers becomes very important.
In the past six-eight months, a number of positive measures have been taken in the CGD space. These primarily relate to obtaining approvals/permissions from the government to lay pipelines. The system has become more decentralised and with the application process becoming an online one, proposals are promptly directed to the concerned state-level authorities, ensuring speedy approvals. Permissions from the railways for laying pipeline networks, which used to take two-three years earlier, are now made available in about three months; similarly, the process for forest and road permissions has also been eased, reflective of an increasingly conducive environment.
The long-term aim of the government is to have at least 10 million domestic PNG connections. Past trends suggest that less than a million connections are added annually, which stand at a cumulative 3 million-3.5 million connections at present. This is barely one-third of the target and, thus, necessitates scaling up of work being undertaken by CGD entities in terms of household coverage. Besides, a greater number of pipeline connections will free up liquefied petroleum gas (LPG) cylinders that can be utilised by the rural population that does not have pipeline connectivity. Further, it also encourages a shift from conventional fuels like wood, cow dung, etc. to more environment-friendly pipeline gas.
Opportunities galore
According the highest priority to the CGD segment in the allocation of domestic natural gas has enabled CGD entities, particularly the incumbents, to be profitable enough to generate their own funds for sustaining their operations. Operators believe that although in the initial couple of years investments may be high and returns almost negligible, in the long term projects are expected to yield good results for investors and implementing agencies.
Hindrances in the path to success
Despite the positives, some problems exist at the resource end and pose concerns for the operator fraternity. Among these, resource availability is a key challenge. The segment is characterised by the non-availability of trained manpower. Besides, most of the critical items in the entire asset base of the segment are imported. With only one or two compressed natural gas (CNG) kit manufacturers in the country, import dependence remains high. Manufacturing and skill development are thus areas that warrant attention. Operators believe that unless all the required resources are available, achieving the 10 million connection target or a larger business share will remain a distant dream.
Another key area of concern is the prevalent complex cost structures, burdened by duties and taxes. Project economics is disturbed further while providing gas connectivity to small towns and cities that have a low consumer concentration. Meanwhile, as per the operators, PNG industry players have to incur investments on pipelines that are 20 times higher than that required for LPG and use more resources (such as steel, plastic, etc.), which results in mounting costs.
Moreover, on the commercial front, although the use of CNG cars has picked up pace in recent years, customers still face issues, thereby leading to limited acceptance. Running these cars, even with the best of kits being installed, is marked with lower performance, heavier weight, and lower vehicle suspension efficiency vis-à-vis petrol cars. In this regard, although lighter cylinders made of carbon fibres are beginning to be used, progress remains slow and until then CNG users remain at a disadvantage. Meanwhile, some operators are of the view that with the onset of the electricity revolution that is expected in the country, gas will face stiff competition from power. Hence, investments should be made keeping in mind a longer-term perspective.
Plans on the anvil
The past two-three decades have witnessed the evolution of the CGD industry in a big way. In 2016, new bidding rounds were undertaken by the Petroleum and Natural Gas Regulatory Board (PNGRB). Bids were invited for the development of CGD networks in five geographical areas (GAs) in the seventh round and eight GAs in the subsequent round. Besides, the PNGRB also plans to invite fresh bids for 27 GAs under the fifth and sixth bidding rounds that either did not receive a bid or received only one bid.
According to the PNGRB Vision 2030 document, demand for natural gas is expected to grow significantly at a compound annual growth rate of 6.8 per cent from 242.6 million metric standard cubic metres per day (mmscmd) in 2012-13 to 746 mmscmd in 2029-30.
Major players in the segment have set ambitious targets to expand their networks. Gujarat Gas Limited (GGL), the biggest CGD entity in the country, added 25 CNG stations in 2016-17 so far, and plans to add another 50 stations in 2017-18. The company is likely to have 90,000 PNG connections by the end of 2016-17, and plans to add 130,000 connections during next year.
Mahanagar Gas Limited (MGL) is planning to add 20 CNG stations despite the challenges of scarcity and high cost of land in Mumbai. The company’s PNG connections are expected to cross the 0.1 million mark by the end of 2016-17. In 2017-18, MGL plans to reach 0.15 million connections. Further, Adani Energy has added six CNG stations and 35,000-40,000 domestic connections this fiscal, and the target for 2017-18 is adding at least another four CNG stations and 40,000 domestic connections.
Hindustan Petroleum Corporation Limited is planning to invest Rs 12 billion in CGD in the next three to five years to expand its network and build infrastructure. In a bid to increase its market share, the company is also looking at expanding its industrial and commercial customer base in Indore and Pithampur through aggressive marketing.
Meanwhile, GAIL (India) Limited is set to initiate CGD projects in Bhubaneswar and Cuttack by the end of 2016-17, where natural gas will be supplied to the cities through the Jagdishpur-Haldia and Bokaro-Dhamra pipelines, which are being developed as part of the Urja Ganga programme. The projects in Odisha entail investments of around Rs 40 billion and Rs 7.5 billion in Bhubaneswar and Cuttack respectively. In Bhubaneswar, GAIL plans to supply PNG to about 0.25 million households and commission 24 CNG stations in the first three to five years to supply fuel to about 0.1 million vehicles. Meanwhile, in Cuttack, PNG connections will be made available to 0.25 million households, while CNG will be made available to 50,000 vehicles through 20 stations. In the initial stage, a pilot project (covering 1,000 households) will be launched, which is expected to be completed by December 20, 2017.
Conclusion
Going forward, a concentration of consumers can improve the viability and efficiency of the CGD system. Besides, efficiency can be increased by establishing industry clusters with common manufacturing and dedicated research and development facilities and new product development and testing facilities. This will go a long way in driving cost savings for CGD players. Moreover, to increase profit margins, it is important to devise strategies to improve the quality of service and the level of penetration. It is also important that adequate infrastructure is created and tariff rates are made competitive.
Based on a panel discussion among Rajeev Mathur, Managing Director, MGL; Nitin Patil, Chief Executive Officer, GGL;and Shridhar Tambraparni, Joint President, Adani Energy, at a recent India Infrastructure conference
