The prospects of the city gas distribution (CGD) segment have improved in the past couple of years. The network has continued to grow and fresh licences have been issued at a much faster pace than had been the case earlier. Gas availability has increased due to priority being given to the compressed natural gas (CNG) and piped natural gas (PNG) segments. Several amendments have been made to the bidding criteria to address most of the concerns of the sector. The recently announced ninth CGD bidding round received a good response from both domestic and global players. In November 2018, the Petroleum and Natural Gas Regulatory Board (PNGRB) also launched the tenth round of CGD bidding.
At present, India has CGD networks in 96 geographical areas (GAs) across 23 states and union territories (UTs), with about 4.65 million PNG connections and 3.2 million CNG vehicles consuming the clean fuel.
Update on ninth bidding round
Launched in April 2018, the ninth round of auctions for 86 GAs, covering 174 districts, was concluded by the PNGRB in August 2018. A total of 78 letters of intent (LoIs) were issued for 90 per cent of the total GAs offered and a total of 21 companies, including two foreign investors and six new investors, were granted the authorisation for CGD networks by the PNGRB under the auction.
Adani Gas Limited emerged as the front runner by bagging licences to retail gas in 22 GAs. Of these, 13 GAs were granted to the company on a stand-alone basis while the remaining nine GAs were authorised to Adani Gas in consortium with Indian Oil Corporation Limited (IOCL). Besides, IOCL received authorisation to build CGD infrastructure in 14 districts – Salem and Coimbatore in Tamil Nadu; Guna and Rewa in Madhya Pradesh; Aurangabad, Kaimur and Rohtas in Bihar; Bokaro, Hazaribagh and Ramgarh in Jharkhand; and Jagtial, Peddapalle, Karimnagar and Rajanna Sircilla in Telangana.
Among the other top winners were Bharat Gas Resources Limited with authorisation to build CGD infrastructure in 11 cities, followed by Torrent Gas Private Limited (nine cities), and GAIL Gas Limited (four cities). Singapore-based Think Gas Investments Pte Limited won licences to build infrastructure in Begusarai, Bhopal and Rajgarh. Philippines-based AG&P LNG Marketing Pte Limited (in consortium with the parent company Atlantic Gulf and Pacific Company [ AG&P]) won licences to build CGD infrastructure in Barmer, Jaisalmer, Jodhpur, Kanchipuram and Ramanathapuram.
Recently, in November 2018, the foundation stone for executing CGD projects in 65 GAs authorised under the ninth bidding round was laid. The pre-construction activities for various allotted GAs have already commenced and physical works on some GAs have also begun.
The ninth round of auctions is expected to expand the potential coverage of CGD infrastructure to about 50 per cent of the country’s population covering over 35 per cent of the area. During the market exclusivity period (first eight years), work commitments include provision of 22.12 million domestic PNG connections, installation of 4,603 CNG stations, and laying of 116,171 inch-km of steel pipelines. The total investment requirement for this bidding round is estimated to be Rs 700 billion, which is nearly four times the cumulative investment undertaken till 2017-18.
Recent initiatives to attract investor interest
The past few rounds of CGD auctions witnessed a lukewarm response. Of the total 106 GAs offered cumulatively in eight rounds, only 56 areas were awarded. In light of this, the PNGRB revised the bidding criteria in the ninth round of bidding such that 80 per cent of weightage, as compared to 0 per cent earlier, is assigned to infrastructure creation to maximise gas network penetration. Private participation was further incentivised with the extension of the marketing exclusivity period for authorised entities to eight years (extendable to 10 years) and fixing a ceiling on the performance bank guarantee amount.
In addition, bidders have been provided with the option of exiting completely after five years, thus lowering the long-term business risks for the successful firms. The maximum weightage of 50 per cent was given to the number of PNG connections to be achieved in the first eight years (from the date of authorisation), followed by a weightage of 20 per cent to the number of CNG dispensing stations to be set up. The length of pipeline to be laid in the GA and the tariff proposed for PNG and CNG were assigned a 10 per cent weightage each. Further, a floor tariff of Rs 30 for city gas and Rs 2 per kg for CNG was fixed to deter bidders from quoting unviable tariffs. The new regulations also provide adequate checks and monitoring by way of prescribed maximum works programme targets for each year for all the measurable segments, underachieving of which would lead to penalties.
The PNGRB’s new bidding criteria proved to be successful in increasing private sector participation in the ninth round of CGD auctions. A total of 406 bids were received from 38 entities in the ninth CGD bidding round, as compared to the lukewarm response of previous rounds. Recognising the need to create infrastructure for the distribution of natural gas and encouraged by the enthusiastic response to the ninth bidding round, the PNGRB has initiated the bidding process for the tenth CGD bidding round.
Launch of tenth CGD bidding round
The tenth CGD bidding round was launched by the PNGRB in November 2018, with the government expecting investments of Rs 500 billion from the winning bidders. This round will cover 50 GAs spread over 14 states and 124 districts, covering 24 per cent of the population and 18 per cent of the country’s area. The last date for submission of technical bids is February 5, 2019. The bids will be opened during February 7-9, 2019. The successful entities are likely to be finalised by end February 2019.
Some of the CGD licences on offer are for Chittoor and Vellore in Andhra Pradesh; Howrah and Hooghly in West Bengal; Kanpur and Bareilly in Uttar Pradesh; Singrauli, Gwalior and Shivpuri in Madhya Pradesh; Muzzaffarpur, Purnia and Bhagalpur in Bihar; Fatehabad and Sirsa in Haryana; Thiruvananthapuram, Kollam and Alapuzzha in Kerala; Mysuru, Hassan, Kodagu and Kalaburagi in Karnataka; Bilaspur and Korba in Chhattisgarh; and Ajmer in Rajasthan. The tenth round will follow the same bidding criteria and regulations as the ninth round of CGD auctions.
According to industry experts, the tenth bidding round is expected to witness intense competition as the winners of the previous rounds are looking to consolidate their position in the CGD segment. Also, a number of new domestic as well as foreign players are likely to participate in this round. Traditional players, mainly public sector companies, including Bharat Gas, IOCL and Oil India Limited, are likely to bid aggressively in this round as these companies were relatively conservative in bidding in the previous round.
Besides, the PNGRB is conducting road- shows to encourage new and potential investors to participate in the tenth bidding round. However, some industry experts are sceptical about the complexity of projects in the tenth round as the GAs being offered are in close proximity to gas transmission pipelines and will require creation of huge infrastructure, leading to higher capital expenditure.
Upon successful completion of projects that are being offered under the tenth CGD bidding round, 70 per cent of the country’s population will have access to a CGD network and about 53 per cent of the country’s area will be fully covered by the CGD network. The overwhelming bidder response in the ninth round and the revised bidding criteria are expected to increase competition in the tenth bidding round. By 2022, the government is aiming to increase the share of natural gas in its primary energy mix to 15 per cent from the existing 6.5 per cent. With this huge CGD infrastructure planned to come up over the next few years, the government is well on its way to achieving the target of moving towards a gas-based economy.