Improving Coverage: CGD business sees greater participation from operators

CGD business sees greater participation from operators

The city gas distribution (CGD) segment in the country has grown tremendously in the past few years. To fulfil its objective of making India a gas-based economy, the Petroleum and Natural Gas Regulatory Board (PNGRB) has announced mega bidding rounds to cover 70 per cent of the population. As of February 2019, 96 geographical areas (GAs) in 23 states/union territories (UTs) have been covered by CGD networks under the first eight rounds of bidding. Further, the recently launched ninth and tenth rounds of bidding have seen an overwhelming response from CGD operators. A total of 406 and 225 bids were received for the ninth and tenth rounds respectively. The enormous response is a result of revised bidding criteria and softer gas prices. Further, initiatives such as accordance of highest priority to compressed natural gas (CNG) and piped natural gas (PNG) for allocation of domestic gas, restrictions on use of pet coke and furnace oil in the National Capital Region, and development of green highway corridor projects bode well for CGD operators. However, challenges related to fluctuating fuel prices, cross-country pipeline tariff regimes and lack of subsidies for CGD projects need greater attention to sustain growth in the segment.

Increasing network coverage

Since the conceptualisation of the National Gas Grid in 2000, the CGD network in the country has increased manyfold. At present, about 46,755 km and 105,245 km of high and medium density pipelines, respectively, have been laid across the country. Of this, the operational natural gas pipeline network constitutes a length of 16,788 km. Till December 2018, about 1,505 CNG filling stations have been set up across the country to provide refuelling facilities to CNG vehicle owners. These CNG stations together serve over 1.03 million domestic, 1,800 industrial and 3,500 commercial users (as of December 2018).

PNG connections have been given to a large number of domestic and industrial users. Till date, about 4.6 million domestic, 26,468 commercial and 8,114 industrial PNG connections have been provided.

Mega ninth and tenth bidding rounds

To develop CGD networks in GAs in a phased manner, the PNGRB has so far carried out eight bidding rounds. Under these rounds, 101 GAs were offered for CGD network development across different locations in the country.

With a target of covering 70 per cent of India’s population under the CGD network, the ninth and tenth bidding rounds were launched in April 2018 and November 2018 respectively. Under the ninth bidding round, 86 GAs covering 174 districts in 22 states/UTs were offered to gas utilities for CGD network development. Ac-

cording to the minimum works programme (MWP), the companies are to lay 116,000 km of high-density pipelines to connect around 20 million domestic households, besides setting up 4,600 CNG filling stations during the market exclusivity period (in the next eight years). Under the tenth round of bidding, 50 GAs covering 124 districts in 14 states have been offered.

Both the rounds witnessed aggressive bidding from CGD companies. A total of 406 bids and 225 bids were received under the ninth and tenth rounds respectively. The process of grant of authorisation to CGD companies was concluded in end February 2019. The GAs awarded under the round include Patna, Aurangabad, Kaimur and Rohtas, Begusarai, Gaya and Nalanda, East Singhbhum, Ranchi, Bokaro, Hazaribagh and Ramgarh, and Giridih and Dhanbad in Jharkhand and Bihar. Among CGD operators, Adani Gas won the licence to develop CGD networks in 13 cities on its own and in nine GAs in joint venture with Indian Oil Corporation Limited (IOCL). Torrent Gas received licences for 10 GAs and Gujarat Gas and IRM Energy bagged one each. The round has a total investment requirement of Rs 700 billion.

Under the tenth bidding round, a total of 12 companies including IOCL, Hindustan Petroleum Corporation Limited (HPCL), Gujarat Gas, Adani Gas Limited and GAIL Gas Limited were approved for issuance of letter of intent on February 26, 2019. The round is expected to attract investments worth about Rs 500 billion. IOCL, HPCL and a consortium of LNG Marketing Pte, Atlantic Gulf & Pacific Company of Manila won the maximum number of nine areas each during the tenth bidding round, followed by Gujarat Gas with six and GAIL Gas with four. Other companies that were successful during the round were Indraprastha Gas (three GAs), Torrent Gas (three GAs), Adani Gas (two GAs) and Bharat Gas (two GAs). Three companies, a consortium of Consortium of Think Gas Investments and Think Gas Distribution, Indian Oil-Adani Gas Private Limited and Rajasthan State Gas Limited won one GA each.

Commercial and economic viability of CGD projects

Even though CGD projects have high fixed capital and low working capital intensity, profitability margins for operators remain healthy. As per ICRA’s analysis, earnings before interest, taxes, depreciation and amortisation (EBITDA) fluctuated but remained favourable during the period 2011-18. EBITDA declined from 24 per cent in 2010-11 to 13 per cent in 2013-14 and then increased to 18 per cent in 2017-18. According to the analysis, favourable factors such as increased gas volumes and softer prices as compared to other alternative liquid and solid fuels will drive margins upward in the future.

From the point of view of end users, natural gas is considered to be economical vis-à-vis other fuels due to a couple of factors. The first being cost benefit. According to ICRA, CNG is cost competitive for end consumers as it is 58 per cent cheaper than mild spirit and 52 per cent cheaper than high speed diesel. CNG vehicles also offer better mileage. One litre of CNG gives an average mileage of 20 km vis-à-vis 15 km per litre with petrol and 18 km per litre with diesel. Further, CNG costs only Rs 2.13 per km vis-à-vis mild spirit which costs Rs 4.75 per km. Also, with respect to running costs of buses, CNG is cheaper as it costs only Rs 8.94 per km than high speed diesel which costs about Rs 18.99 per km.

PNG too scores well as compared to liquid petroleum gas cylinders due to convenience and safety factors. However, in terms of profitability, domestic PNG is only marginally profitable for companies. On the other hand, margins of the commercial PNG segment remain robust. In addition, several qualitative benefits such as no waiting period and no storage space requirement for cylinders also attract a greater number of household customers.

 

Conclusion

The growth in CGD demand across the country is set to increase with the development of CGD networks under the ninth and tenth rounds, commissioning of new pipeline networks in the east and Northeast as part of the Urja Ganga project and the development of green highway corridors. For successful and timely completion of projects, there is a need for increasing domestic gas production, investing in skill-building and training of manpower, delivering infrastructure as stipulated in the MWPs and providing financial support in the form of viability gap funding to gas pipeline projects. These steps hold the key to translating the government’s goal of covering 70 per cent of India’s population with CGD infrastructure in the coming years into a reality.