The government has set a target of providing 10 million piped natural gas (PNG) connections by 2020. With this in mind, city gas distribution (CGD) operators are working aggressively to expand the natural gas distribution network in the country. Over the past year, they have successfully commissioned new compressed natural gas (CNG) stations and provided PNG connections, taking the total number of stations to 1,306 (as of January 1, 2018) and PNG connections to 4.08 million. For instance, Mahanagar Gas Limited (MGL), a leading CGD company, is looking to provide 150,000 new PNG connections in 2017-18 (taking its total PNG connections to about 1 million of the 4.1 million PNG connections in the country). It is also setting up 20 new CNG stations during the year. In addition, Indraprastha Gas Limited (IGL), which is a relatively new player, has been focusing on setting up CNG stations and commissioned 90 new CNG stations in 2016-17, which was a new record. During the year 2017-18, IGL expects to commission about 30 new CNG stations and provide about 150,000 new PNG connections. In comparison, companies like Gujarat Gas Limited (GGL), which operate in areas that are already quite saturated, are targeting only 100,000 new PNG connections during 2017-18. Meanwhile IGL is trying to balance its customer portfolio, which was heavily skewed towards the industrial segment till recently, with an industrial consumer to other consumer ratio of 80:20. However, this is now improving and GGL has successfully reached a portfolio ratio of about 70:30. It expects to reach a ratio of 60:40 in the future through the extensive acquisition of commercial and domestic consumers. It further expects to commission about 50 new CNG stations during 2017-18.
Policy and regulatory support
The industry overall seems optimistic about the policy and regulatory environment. The Petroleum and Natural Gas Regulatory Board (PNGRB) has been rather active in the past two years, and has extended its support to CGD players by offering a more collaborative approach. The central government is providing the required policy support and helping in fast- tracking projects and clearances. For example, the turnaround time for permission from the railways has been reduced from over a year previously to less than three months. Under the new Ministry of Road Transport and Highways guidelines, permissions for laying pipelines near state highways are being granted at the state level, thus saving time. Forest clearances have also been fast-tracked for CGD operators.
Issues and challenges
While the CGD industry has seen growth in the past few years, it has also faced its share of issues and challenges, which have limited growth to less-than-desirable levels. One of the major challenges that operators are facing is lack of cooperation from state governments and municipalities for digging for and laying of pipelines. The operators are now requesting state governments to provide the necessary support. For instance, the municipalities in the Amritsar and Bhatinda blocks, which were allocated to GGL, quoted very high tariffs for providing assistance for digging for and laying pipelines. However, GGL has requested the Punjab government to intervene and has shared the Gujarat state model for development which provides standardised rates for such works. GGL expects the model to be accepted for Punjab and finalised in the upcoming budget session of the Punjab government. Another area where operators face challenges is the lack of availability of skilled manpower. For this, the PNGRB has requested consulting firms to create training modules for the workforce in the industry. Other areas of concern include finding good contractors and getting clearances from the Petroleum and Explosives Safety Organisation.
CGD operators are also requesting the central government to fast track permissions along similar lines as the ones granted to the telecom sector for cables, as laying natural gas pipelines is a “linear” project similar to cable projects in the telecom sector. Another area highlighted by the operators is to bring natural gas under the ambit of the goods and services tax (GST), so as to enable producers to claim input tax credit and contain costs. Moreover, GST of 28 per cent is being charged on CNG kits. Operators have requested the government to bring this down, to enable the wider adoption of these kits.
Capex outlook and new area development
The development of CGD infrastructure is a highly capital-intensive business and leading CGD players have drawn up plans for significant capital expenditure. In the future, MGL, IGL and GGL plan to make capital investments of about Rs 5 billion, Rs 7 billion and Rs 7-8 billion, respectively, during 2018-19. Most of this investment will be towards laying new pipeline infrastructure, commissioning new PNG connections and CNG stations, and undertaking new area development.
For new area development, IGL has been allocated a number of blocks in Haryana. These include Karnal, Gurugram and Rewari (Dharuhera and Bawal). The company is planning to develop these at investments of Rs 0.8 billion, Rs 1 billion and Rs 1 billion (Dharuhera and Bawal combined) respectively. MGL is developing a new area in Raigarh using a virtual pipeline concept as acquiring land and getting approvals is taking time. It is also setting up a cascade storage facility at Rewari, Haryana. GGL is developing a number of new areas in Gujarat as well as outside the state. Within the state, it is developing Jamnagar, Bhavnagar and Dahej, while outside Gujarat, the company is developing the Thane rural area in Maharashtra, and Amritsar and Bhatinda in Punjab.
The road ahead
Going forward, the industry is expected to see infrastructure development across the board, from the laying of basic pipelines to the adoption of innovative solutions such as smart meters and mobile CNG dispensers. One commonality that has been observed is that all the CGD operators are looking to tap the commercial and domestic segments considerably. For instance, GGL is actively working with two-star and three-star hotels to help them adopt PNG as a cleaner and more economical fuel. Operators also see a huge opportunity in the transport sector, which is increasingly moving away from traditional fuels to CNG. To cater to this growth, the operators are aggressively commissioning new CNG stations.
Industry players are also adopting a number of innovative solutions. For instance, IGL has set up a 5×1.5 foot mobile dispenser facility which will essentially be a CNG station on wheels. GGL is moving from normal meters to smart meters in a bid to enable more efficient leak detection. MGL is actively promoting the use of domestic gas in applications other than cooking, such as domestic heating, drying, etc. Thus, with regulatory support from the PNGRB and a favourable policy outlook, operators are more optimistic about the future of the CGD industry. While demand could be partially affected by the introduction of electric vehicles (EVs), the impact of EVs is likely to be felt only after another 5-10 years.
Based on a panel discussion among Rajeev Mathur, Managing Director, MGL; Nitin Patil, Chief Executive Officer, GGL; and E.S. Ranganathan, Managing Director, IGL, at a recent India Infrastructure conference