A watershed year in the country’s city gas distribution (CGD) segment, 2018-19 witnessed a large number of geographical areas (GAs) being awarded in Rounds 9 and 10 of bidding. Both the rounds received overwhelming response from the industry. Upon successful completion of CGD projects in the areas awarded, 70 per cent of the country’s population will have access to a CGD network and about 53 per cent of the area will be covered by the network.
A key enabler has been a slew of long-pending amendments to the bidding criteria. The amended regulations have addressed most of the concerns. The market exclusivity period has been increased from five years to eight years, 80 per cent weightage has been given to infrastructure creation (as compared to 0 per cent earlier), tariff floors have been set to discourage unviable bids, the additional bid bond requirement has been removed, and penalties have been imposed for underachievement of minimum work programmes (MWPs).
Network size and growth
As of June 2019, the CGD network is present in 91 operational GAs. These are operated by 36 CGD companies that have been authorised by the Petroleum and Natural Gas Regulatory Board (PNGRB). Currently, there are over 1,700 compressed natural gas (CNG) stations, over 5 million piped natural gas (PNG) connections, and upwards of 2,600 thousand metric tonnes of gas sales. During 2018-19, the CGD segment consumed 25.56 million metric standard cubic metres per day (mmscmd) of gas, a slight increase from the 24 mmscmd of gas consumed in 2017-18.
Since 2014-15, the most significant growth (in terms of compound annual growth rate [CAGR]) has been recorded in the piped natural gas (PNG) consumer base. Both the domestic and industrial segments witnessed a CAGR of over 10 per cent from 2014-15 to 2018-19, with a maximum of 15.15 per cent registered by the domestic/household segment.
The number of compressed natural gas (CNG) stations in the country increased from 995 stations in 2014-15 to 1,730 in 2018-19, a high growth rate of 14.83 per cent. Haryana had the highest CAGR of 42.5 per cent with the number of CNG stations having increased from 16 in 2014-15 to 66 in 2018-19.
Rounds 9 and 10
The ninth round of bidding for award of CGD licences was launched in April 2018, with 86 GAs offered. These GAs were spread across 174 districts (156 complete and 18 part in 22 states and union territories (UTs), covering 26 per cent of the country’s population and 24 per cent of its geographical area. This round witnessed aggressive bidding with a total of 406 bids received from 38 entities (37 bids were not considered on various grounds such as being unreasonably low or high). Of the 86 GAs on offer, 85 authorisations have been issued (expect for Kanchipuram for which authorisation has not been issued). There were over 22 winning entities in this round.
After six months, in November 2018, the PNGRB launched the tenth round of bidding with 50 GAs put up on offer. The GAs offered were spread across 14 states, covering 24 per cent of India’s population and 18 per cent of its area. A total of 225 bids were submitted by 25 entities and there were over 10 winning entities. Of the 50 GAs on offer, 45 authorisations have been issued so far. For five GAs – Nawada and Koderma in Bihar and Jharkhand; Seraikela-Kharsawan in Jharkhand; Raisen, Shajapur and Sehore in Madhya Pradesh; Jaunpur and Ghazipur in Uttar Pradesh; and Mirzapur, Chandauli and Sonbhadra, also in Uttar Pradesh, letters of interest have been issued. However, as of June 11, 2019, authorisations are yet to be issued.
Notable trends
Strategy by incumbent players: Securing strategic GAs
In the previous two rounds of bidding, incumbent players such as GAIL (India) Limited, Indraprastha Gas Limited (IGL) and Gujarat Gas Lim-ited adopted a cautious and strategic approach to secure their GAs. As per Edelweiss Securities, these entities remained selective in bidding by focusing on maintaining current levels of return on capital employed, which led to them being outbid by new aggressive entrants. For instance, Gujarat Gas Limited won six areas across Haryana, Madhya Pradesh, Punjab and Rajasthan, where gas pipeline infrastructure that belongs to Gujarat State Petronet (its parent company) can be monetised.
Aggressive bidding
The main aim behind the aggressive bidding witnessed in the CGD space has been to secure licences, with little consideration and commitment to development of the requisite infrastructure. Regulations have had limited success in checking this trend. In Rounds 4-8, a trend of aggressive bidding emerged, as CGD companies resorted to a strategy of quoting near-zero bids for network tariff and compression charges. The trend continued in the ninth and tenth rounds too. Private players such as Adani aggressively scouted for and secured a major share of new areas. Also, a number of private players have quoted exceptionally high targets for PNG connections and CNG stations to be developed in the first eight years to secure profitable GAs.
According to Edelweiss, this aggressive bidding trend may give rise to consolidation in the segment in the coming years. This is likely to benefit the incumbents, as new entrants may fail to deliver on the steep targets stipulated in the MWPs. In June 2019, reportedly, Torrent Gas Limited bought the Essel Group’s CGD business, Siti Energy Limited. Siti Energy is currently developing CGD projects in western Uttar Pradesh. No financial details related to the transaction have been divulged yet. The trend may gain traction going forward as more players miss MWP targets, forcing them to consider offloading their interests.
Increasing presence of OMCs: Focus on diversification
As the focus on making the transition to a low carbon pathway is increasing worldwide, the situation in the Indian oil and gas market is no different. A number of global oil companies are placing their bets on the renewables and gas segments, in a bid to diversify their business, as climate change risks are putting increasing pressure to put brakes on the use of more carbon-intensive fossil fuels. In the recent rounds of bidding, Indian oil marketing companies (OMCs) showcased a similar trend. According to Fitch, the recent award of CGD rights to players such as Indian Oil Corporation Limited and Bharat Petroleum Corporation Limited will help them diversify and maintain their market shares in the domestic cooking and auto fuel markets over the long term.
Financing-related activity on the rise
With new areas awarded in the recent two rounds, the segment, slated for higher growth in the coming years, has started attracting investor interest. There has been significant uptake in financing activity. In December 2018, Unison Enviro Private Limited received Rs 1.5 billion worth of investment from Morgan Stanley India Infrastructure. Some entities have plans of getting listed on the stock exchange. GAIL plans to list GAIL Gas Limited, a prominent player in the segment. In November 2018, Adani Gas Limited demerged from the Adani Enterprises Group and was listed on the National Stock Exchange.
Outlook
The outlook for the CGD segment is quite sanguine. That said, there are some caveats for ensuring the expected growth. The past 12-18 months have been an inflection point in the CGD space. The recently concluded bidding rounds have gone all out with regard to the area to be taken up for development of CGD infrastructure. With the euphoric industry response received in the recent rounds, activity with regard to development works is slated to move at a much greater pace in the next three-five years. Business risks, however, do exist. While some are due to the nature of the CGD business (such as high capex, slow volume build-up, sluggish pipeline connectivity), others relate to crucial aspects of gas allocation to CGD as a preferred segment. If the gas allocation policy changes, it will impact the viability of entities that rely on domestic gas to meet most of their gas needs.
With regard to infrastructure development, trunk pipeline connectivity (and thus, gas availability) has been a major laggard that has impacted the progress of the segment so far. Even so, progress on projects such as the Urja Ganga pipeline is expected to open up new avenues for CGD development in regions that remain underpenetrated.
As CGD activity is expected to pick up significantly, the segment will be replete with opportunities for various market and technology providers. Pipe manufacturers, for instance, can expect opportunities to the tune of Rs 1,580 billion; dispensation equipment makers about Rs 160 billion and compression equipment makers about Rs 86 billion. Opportunities worth over Rs 100 billion also exist for meter manufacturers. However, legacy issues related to gas availability, slow volume build-up, land acquisition and securing of requisite clearances, as well as sluggish pipeline development will have to be addressed.