Trends and Outlook

CGD segment poised for growth

The Indian city gas distribution (CGD) segment has seen a consistent growth in volumes over the past two years. CGD volumes increased from 17.4 million metric standard cubic metres per day (mmscmd) in the fourth quarter of 2015-16 to 20.9 mmscmd in the corresponding quarter of 2016-17. This has been a result of softer prices of natural gas globally and fresh licences issued at a much faster pace by the Petroleum and Natural Gas Regulatory Board (PNGRB). As per directives, gas to the compressed natural gas (CNG) and piped natural gas (PNG) segments is made available on priority. This has enabled CGD companies to cut prices and regain competitiveness. In addition, permitting CGD companies to freely price their products has removed uncertainties in pricing.

The demand for industrial PNG has remained stagnant due to competition from cheaper fuels such as furnace oil and pet coke. It has also been affected due to a slowdown in industrial growth witnessed recently. However, the demand for PNG is now expected to increase with the Supreme Court’s October 2017 order banning the use of pet coke and fuel oil in the National Capital Region, Rajasthan, Haryana and Uttar Pradesh. As per statistics available from the Petroleum Planning and Analysis Cell of the Ministry of Petroleum and Natural Gas, the number of industrial PNG connections increased from 7,079 in September 2017 to about 7,346 in January 2018.

In comparison, the demand from domestic PNG has been growing steadily with the government’s announcement of providing 10 million PNG connections by 2020. The number of domestic PNG connections increased from about 3.87 million in September 2017 to about 4 million in January 2018. With CGD companies now looking to increasingly tap the commercial PNG segment, demand is also expected to grow in this segment as well. The number of commercial PNG connections increased from 25,180 in September 2017 to about 28,640 in January 2018.

Meanwhile, demand for CNG continued to increase as its adoption by the transport sector steadily increased due to its cost competitiveness over other fuels such as petrol and diesel. The sale of CNG increased from 2 million tonnes per annum (mtpa) in 2014-15 to about 2.4 mtpa in 2016-17. The number of CNG stations increased from 1,273 in September 2017 to 1,306 in January 2018. Similarly, the number of CNG vehicles also increased from 2.9 million in September 2017 to 3 million in January 2018.

Pricing

The price of domestic gas has seen a significant decline from November 2014 to April 2017. Industry players were able to pass on this cost advantage to end consumers while maintaining their profits due to robust margins available in the business when supplying in high volumes. However, this was not the case with industrial CNG and PNG which continued to be volume challenged by cheaper fuels. However, this situation is now expected to ease with the recent banning of the use of pet coke and furnace oil.

Update on bidding rounds

The eight rounds of bidding conducted by the PNGRB have seen a mixed industry response. While some lucrative geographical areas (GAs) saw multiple bids, some of the less attractive GAs received one bid or failed to receive any bid at all on account of relatively weaker prospects. Another trend observed, especially in rounds 4-6 of the bidding, was that most bidders had bid aggressively at the lowest possible network and compression charges of

Re 0.01 per million metric British thermal units and Re 0.01 per kg, respectively, which resulted in higher business risks for the bid winners post the marketing exclusivity period of five years. Keeping these challenges in mind, the PNGRB issued revised draft bidding regulations in January 2018, where it has amended the regulations to make them more suitable for serious players. For example, the minimum net worth for bidding has been increased from

Rs 0.05 billion to Rs 0.5 billion. Also, the marketing exclusivity period has been increased to eight years. With the revised guidelines in place, the PNGRB is likely to undertake the ninth round of bidding soon where it will offer 86 GAs spread across the entire country.

Growth in natural gas pipeline network

The country’s natural gas pipeline infrastructure is currently at a nascent stage of development. There is thus a huge potential for increasing pipeline penetration. The government has announced a number of initiatives to tap this potential. One such is the as Urja Ganga initiative, under which it plans to lay two pipelines – one from Jagdishpur to Haldia and the other from Bokaro to Dhamra – spanning a total length of 2,655 km across Uttar Pradesh, Bihar, Jharkhand, Odisha and West Bengal. These pipelines are expected to benefit 25 industrial clusters, 40 districts and 2,600 villages, help in the revival of defunct fertiliser plants at Barauni, Gorakhpur and Sindri, and supply natural gas to refineries, steel plants and the CGD segment in Varanasi, Bhubaneswar, Ranchi, Cuttack, Patna, Jamshedpur and Kolkata. The project is being undertaken by GAIL (India) Limited, which is providing a viability gap funding of 40 per cent of the total project cost of Rs 12.94 billion. The first phase of the project is expected to be completed by December 2018 and the second phase by December 2020. The project will be further extended to all state capitals in the Northeast, thus increasing gas supply to the region.

The government is also developing green corridor projects, under which it will provide CNG and PNG connections across key identified corridors. At present, six corridors have been identified for development. Once these projects are completed, the country could expect to have a pan-Indian pipeline network, possibly in the next four-five years.

Future outlook

Going forward, supply from domestic gas suppliers will not be enough and there will be an increasing transition towards imported liquefied natural gas (LNG). To meet the growing demand, regasified LNG terminal capacity is expected to increase to 61.5 mtpa by 2023. In terms of pipelines, with the extension of Urja Ganga to the north-eastern states, penetration is expected to increase. With the development of green corridors and intercity gas transport, the demand for CNG and PNG is also expected to increase. In terms of fuel economics, CNG is likely to continue to offer higher margins. Also, industrial PNG, which was previously only marginally profitable due to demand competition from cheaper fuels, could see an increase in demand with the ban on pet coke and furnace oil. The demand for domestic PNG is also expected to increase, driven by the government’s initiative of providing 10 million PNG connections by 2020. The sector could see aggressive bidding in the coming PNGRB bidding rounds with a number of favourable regulations such as an extension of the marketing exclusivity period, etc. The revised bidding regulations are likely to attract greater investor interest as well. There is also a huge opportunity for technology players as most of the CGD operators are testing improved technologies and best practices to ensure effective operations. There is an increased emphasis on improving metering and billing using technologies such as smart meters and also on reducing losses due to leakages by using technologies such as infrared leakage detection, etc. There is a significant opportunity for all stakeholders in the sector and it thus seems poised for growth.

Based on a presentation by

K. Ravichandran, Senior Vice-President and Co-Head, Corporate Ratings, ICRA Limited, at a recent India Infrastructure conference

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