India has city gas distribution (CGD) networks in 91 geographical areas (GAs) operated by 36 firms. With 16,500 km of pipelines in operation, around 4.2 million domestic consumers and over 33,000 industrial and commercial consumers, 19 per cent of the country’s population has been covered by the CGD network. The Petroleum and Natural Gas Regulatory Board (PNGRB) launched the ninth CGD bidding round on April 12, 2018 to expand CGD network coverage, particularly in the vast untapped areas of eastern and southern India.
Update on the ninth bidding round
The ninth round of auctions for CGD licences is set to alter the industry landscape, with the government expecting an investment of Rs 700 billion from the winning bidders. This amount is four times the cumulative Rs 150 billion-Rs 180 billion invested till 2017-18. On offer are 86 GAs in 174 districts, covering 29 per cent of the population, compared with a cumulative 56 GAs awarded in the previous eight rounds in the past 10 years. The new GAs on offer include Chennai, Coimbatore, Visakhapatnam, Aurangabad and Bhopal, which have good demand potential. The last date of bid submission was July 10, 2018. Over 400 bids were received for all the 86 GAs offered in the ninth round. The technical bids were opened between July 12, 2018 and July 18, 2018. The successful entities will be finalised by October 2018 after technical and financial evaluation of the bids. However, the PNGRB is trying to expedite the process.
According to reports, the Adani Group emerged as the top bidder eyeing 52 cities, with GAIL Gas Limited putting in bids for close to 30 cities. Indraprastha Gas Limited (IGL), which retails CNG in the national capital region, put in bids for 13 cities and Essel Infraprojects Limited put in a total of seven bids. India Gas Solutions Private Limited, the 50:50 joint venture of the UK’s BP Plc and Reliance Industries Limited, is making its maiden foray in India’s CGD business as it put in a bid for 15 cities.
Some of the CGD licences on offer are for Bhopal in Madhya Pradesh; Ahmednagar in Maharashtra; Ludhiana and Jalandhar in Punjab; Barmer, Alwar and Kota in Rajasthan; Coimbatore and Salem in Tamil Nadu; Allahabad, Faizabad, Amethi and Rai Bareli in Uttar Pradesh; Dehradun in Uttarakhand; and Burdwan in West Bengal.
The past few rounds of CGD auctions had evoked a lukewarm response. The fourth round was first cancelled (November 2011) and later fresh bids were invited in October 2013. The fifth round saw a limited response with most GAs receiving a single bid or no bid at all. The sixth round of bidding for 34 cities in 2015 received bids for only 20. The seventh round of bidding, to set up CGD infrastructure in 11 smart cities under the Smart Cities Mission, received only one bid. Seven cities were offered in the eighth round last year, but not all the cities have been awarded so far. However, greater participation is expected in the ninth round of auctions as there is now a cap on the performance bank guarantee amount that bidders can offer. In the earlier rounds, the bank guarantee amount was the deciding factor due to bidders quoting ridiculously low compression charges and network tariffs (as low as Re 0.01 per unit).
Since the CGD business is more profitable in large cities, licences for them are expected to draw greater bidding interest. Bidders are also expected to favour GAs adjacent to existing pipeline networks. Increased participation from public sector oil majors is likely, given the government impetus and higher weightage given to the number of new domestic connections in the bidding criteria.
The changed regulations announced by the PNGRB for granting authorisations for setting up CGD networks and natural gas stations will help attract more investor interest in the ninth bidding round. The amended regulation has addressed most of the concerns of the sector. The need for changes in the regulation emanated from the ineffectiveness of the earlier bidding criteria.
The bidding criteria have been revised such that 80 per cent weightage, as compared to 0 per cent earlier, is assigned to infrastructure creation so that gas network penetration is maximised. Participation of more players is incentivised with the extension of the marketing exclusivity period for authorised entities to eight years (extendable to 10 years) as compared to five years earlier.
The new regulation also provides adequate checks by way of the prescribed Minimum Work Programme targets for each year for all three measurable segments – steel pipeline length, compressed natural gas (CNG) stations and domestic connections. In case of underachievement, there are penalties for each year. A year-by-year penalty will be levied if the proposed piped natural gas (PNG) connections and CNG stations are not developed. Also, if the industry bids are too low or too high with respect to providing PNG connections or constructing CNG stations, then such bids can be rejected by the PNGRB. Further, the new regulation provides for adequate predefined penalties to be imposed on the authorised entities in case of interruption in gas supply to consumers and non-adherence to other service quality standards. In addition, the provision of a complete exit option after five years is favourable for bidders as it reduces the long-term business risk.
In the new guidelines, the maximum weightage of 50 per cent has been given to the number of PNG connections proposed in eight years from the date of authorisation, as compared to 30 per cent earlier. The number of CNG dispensing stations proposed to be set up has been assigned a 20 per cent weightage. The length of the pipeline to be laid in the GA and the tariff proposed for city gas and CNG have been assigned 10 per cent weightage each. Also, a floor tariff of Rs 30 for city gas and Rs 2 per kg for CNG has been determined in order to deter bidders from quoting unviable tariffs of 1 paisa per unit.
Thus, the regulation allows for a higher incentive, but also clearly provides for penalties if adequate efforts to meet the commitments are not made by the bid winners, which is a positive for the development of the CGD sector in the long term.
After the contracts are awarded, the government aims to expand CGD coverage to nearly 50 per cent of the total 640 districts in the country and to about 50 per cent of the population. The government plans to connect 10 million households to PNG by 2020. The ninth round is expected to receive a far better response than before because of the revised bidding norms and the push from the government through favourable policies. These include a marketing exclusivity period of eight years, tariff floors to discourage unviable bids, removal of additional bid bond requirement, and evaluation of bids based on greater infrastructure creation.