The city gas distribution (CGD) sector has shown significant progress in the past six months. The government has taken several initiatives to attract investments in the sector and expedite the process of granting authorisations. The bidding criteria have been revised – market exclusivity period has been increased to eight years (as compared to five years earlier), 80 per cent weightage has been assigned to infrastructure creation (as compared to 0 per cent earlier), tariff floors have been set to discourage unviable bids, additional bid bond requirement has been removed, penalties have been imposed for underachievement of minimum work programmes, etc. The processes for obtaining the necessary permissions have also been streamlined and simplified.
Further, the government has also introduced supportive regulations such as mandating compressed natural gas (CNG) in major cities, 100 per cent allocation of domestic natural gas for domestic piped natural gas (PNG) and CNG segments, and the development of gas infrastructure in the eastern part of the country.
The country is also planning several new initiatives. There has been an announcement regarding the launch of a gas trading hub by December 2018. CGD operators feel that this will ensure transparency by bringing in clarity on the actual gas rates prevailing in the market, which is essential for developing the industry further. Operators also feel that the ninth CGD bidding round held during May-October 2018 was a significant step as it has started creating demand for resources from across the industry. For instance, in addition to the requirement for materials and manpower, it has also created the need for other resources such as high quality consultants who could help the operators with the necessary technical and financial expertise.
This growth in CGD infrastructure driven by the ninth CGD bidding round could also act as a catalyst for other areas such as liquefied natural gas (LNG).
Current infrastructure and the ninth CGD bidding round
The CGD industry in the country is dominated by a few large players such as Gujarat Gas Limited (GGL), Mahanagar Gas Limited (MGL) and Indraprastha Gas Limited (IGL). These players own most of the CGD network. The recent bidding rounds have also seen participation by players such as Hindustan Petroleum Corporation Limited (HPCL) and Petronet LNG Limited. HPCL won one geographical area (GA) in the ninth bidding round while Petronet was unable to win any.
GGL currently has a CGD network of over 23,000 km servicing over 1.3 million customers. It has over 300 CNG stations. In terms of volume, it is the largest operator in the country providing 6.5 million metric standard cubic metres per day (mmscmd) of gas. About 70 per cent of this gas is consumed by industrial users, while the rest is consumed by CNG, PNG, commercial and domestic users. HPCL has a CGD network in Ahmedabad with a mother station and 24 daughter booster stations. Besides, HPCL has two joint ventures, Bhagyanagar Gas Limited with GAIL (India) Limited and Godavari Gas Private Limited with Andhra Pradesh Gas Distribution Corporation Limited.
In the recently concluded ninth bidding
round, GGL won the licence for developing the CGD network in Narmada (Rajpipla) district, while HPCL won the licence for Sonipat (except areas that are already authorised) and Jind districts.
Proposed capex and key targets
In 2017-18, GGL was able to set up 46 CNG stations in the country and its target for 2018-19 is 65 stations. GGL is also planning to provide 0.1-0.15 million PNG connections per year going forward. With regard to capital expenditure, during 2019-20, GGL is planning to spend Rs 5 billion-Rs 6 billion which will be mobilised from its own resources. However, if the company is able to spot any suitable opportunities pertaining to network expansion or acquisition which can bring in early revenue generation, then it could make an additional capex of Rs 2 billion-Rs 3 billion. HPCL has proposed a capex of Rs 10 billion for the eighth CGD bidding round and Rs 6 billion for the ninth round.
Issues and challenges
CGD operators feel that the ninth round of bidding has been a huge success. However, actually setting up the networks is expected to entail a number of challenges. For instance, the ninth round saw a change in the bidding criteria. In this round, 50 per cent weightage was given to the number of domestic PNG connections that the operator would provide. This prompted some operators to submit highly ambitious numbers. The industry feels that this could be a challenge as it might become difficult for the operators to achieve these targets due to scarcity of available resources and skilled manpower.
Another major challenge is the shortage of skilled manpower. The government is now taking the necessary steps to bridge this gap. It has established a skill development centre to train professionals through various certificate courses. There is also an emphasis on hiring only those who have the requisite certification. CGD operators are of the view that the resolution to this problem will still be a long time coming. They also fear that there would be instances of employee poaching for skilled manpower under the present circumstances.
Another challenge is the limited availability of raw materials in the country. For instance, there is only one Indian company which manufactures gas meters and it has a capacity to supply about 0.2 million meters per annum to the industry. Thus, the remaining meters will have to be imported if the targets given under the ninth bidding round are to be met. This is expected to result in an escalation in prices of these inputs. For example, the price for steel pipelines which was previously about Rs 2,000 per metre has gone up to Rs 3,500 per metre recently.
The provision of pipeline connectivity to feed the CGD network that has been laid will also be a challenge for some GAs. For instance, GGL’s authorised GA in the Narmada region is about 56 km from the nearest gas pipeline. To overcome this, GGL is planning to deploy LNG trucks for gas transportation as of now. Similarly, while HPCL has a licence to operate in the Kolhapur region in the eighth CGD bidding round, there is no pipeline connectivity in this region at present. HPCL is planning to take CNG from the Pune region to start operations.
GGL’s experience outside Gujarat
GGL has also developed CGD networks outside Gujarat. The first venture outside the state was in Dadra & Nagar Haveli where the CGD network was laid with relative ease. From this, GGL moved to Thane and Palghar in Maharashtra. Initially, the operator struggled to develop the area, but in the past eight months things have changed in Maharashtra which has made it easier for GGL to operate in the region. It has recently commissioned a daughter station on National Highway-8 near Vasai, Maharashtra. The mother station has already been commissioned. Permission to lay pipelines in Vasai is currently pending as the environmental clearance to operate near the area (which falls in a wildlife conservation zone) is yet to be obtained. However, GGL plans to use LNG tankers to start gas distribution in the area.
In Punjab, GGL faced a number of challenges to begin with, after which the government announced a new policy for single-window clearance to improve project implementation. The Jalandhar-Amritsar pipeline is currently in the process of being commissioned. GGL has laid a 15 km trunk pipeline for transmitting gas to Jalandhar city. It has also constructed three CNG stations in the area and one station has already been connected to the pipeline. In the next two-three years, GGL is planning to cover the entire Amritsar area along with Bathinda under its CGD network.
Further, GGL has signed an MoU with Petronet LNG for undertaking a pilot project using LNG as a fuel for vehicles. Under the pilot study, three LNG dispensing stations are being set up. GGL is also in talks with foreign players to set up electric vehicle charging stations. It is also working with the Surat Agricultural Produce Market Committee to use garbage from the market for generating 5,000 cubic metres of gas. If the pilot project is successful, GGL plans to set up similar projects across Gujarat.
The ninth CGD bidding round is expected to lead to the development of significant CGD infrastructure and will help increase the share of natural gas in the country’s energy mix. According to industry representatives, the past six months have seen significant policy and regulatory developments, and these are expected to benefit the CGD industry as a whole. However, it is feared that there could be some challenges in sourcing the necessary raw materials and providing skilled manpower for the upcoming projects. Nevertheless, the industry is expected to overcome these issues and expand the CGD infrastructure going forward.
Based on a panel discussion between Nitin Patil, Chief Executive Officer, Gujarat Gas; and Dilip Kumar Pattnaik, Executive Director, Gas & Renewable, HPCL, at a recent India Infrastructure conference