India is working towards increasing the share of natural gas in the energy basket, and a major prerequisite for increasing natural gas demand is the development of a countrywide pipeline transmission network. At present, the pipeline network has a length of 16,226 km and a capacity of 369 million metric standard cubic metres per day (mmscmd), spread across 15 states and union territories. The network is still sparse, given the huge upfront investment costs in developing pipelines and the lack of interest of gas producers and shippers (who deliver gas from the pipeline to the end consumer) at the conceptualisation stage. Even though the government has given special attention to gas infrastructure development across the length and breadth of the country, progress remains slow.
In such a scenario, one of the ways in which the government and private developers can speed up pipeline network creation is by unlocking the capital tied up in operational infrastructure assets through infrastructure investment trusts (InvITs). An InvIT is a pool of money collected from investors to manage operational infrastructure projects, in return for a regular yield to its unit holders. InvITs can help in transferring existing transmission pipelines to various asset management companies, thus monetising the asset and freeing up capital which can then be deployed for setting up new pipelines. They can also help in attracting foreign investment into the country’s oil and gas sector. The acquisition of the East-West gas pipeline was carried out by an InvIT established by Brookfield Asset Management Limited. In March 2019, the company acquired the 1,480 km East-West natural gas pipeline owned by Reliance Industries Limited (RIL) for Rs 130 billion. The deal marks the first-ever monetisation of any private gas pipeline in the country.
The InvIT took a 100 per cent stake in Pipeline Infrastructure Limited (PIL) that owns and operates the pipeline.
The 48-inch East-West pipeline runs from Kakinada to Bharuch and connects major domestic supply hubs in the east to key demand centres in the west. It traverses through five states – Andhra Pradesh, Telangana, Karnataka, Maharashtra and Gujarat. The pipeline is in a unique position to offer transportation services in either direction (east to west or west to east) depending on customer requirements, with a high level of penetration in the hinterland. It will thus be a vital link in the proposed national gas grid.
The major gas source for the pipeline is the Krishna-Godavari (KG) basin’s KG-D6 gas block. The pipeline transports regasified liquefied natural gas (R-LNG) from LNG terminals along the stretch of the pipeline. Moreover, it is connected to pipelines of other operators such as those of state-run GAIL (India) Limited and Gujarat State Petronet Limited for onward nationwide delivery. The pipeline, which has an original design capacity of 80 mmscmd, had been operating at very low capacity levels due to a drastic fall in output from RIL’s KG-D6 block.
The current capacity utilisation of the pipeline is 20-22 per cent. PIL is assessing the viability of connecting the pipeline directly to all possible gas sources to maximise volumes. Further, given RIL and its partner BP India’s fresh investments of Rs 400 billion in the KG basin and the expected commissioning of LNG terminals on the east coast, the average volume expected to be transported through the pipeline is likely to be far higher than the current levels. Capacity utilisation is therefore expected to increase to 50 per cent in the next one or two years.
On the demand side, PIL has installed interconnects and spur lines for delivering gas to customers either directly or through third-party networks. The gas transmission company has recently connected Ramagundam Fertilisers and Chemicals Limited to the pipeline. Work to deliver gas to 10 city gas distribution companies is also under way. Further, PIL is also working on streamlining the process of booking pipeline capacity, thus making the process easier for customers and shippers.
Conclusion
The RIL-Brookfield deal has paved the way for infrastructure development through InvITs in the country’s oil and gas sector. The transfer of operational assets can help in increasing international participation across the value chain. Foreign investors providing access to capital through InvITs also bring in expertise to run operations efficiently. Further, the government is planning to unbundle GAIL by hiving off its gas marketing and pipeline business. As part of the process, the government aims to sell its majority stake in the company’s pipeline business to strategic investors. However, various measures such as rationalisation of tariffs, allowing the insurance and pension sector to invest in InvITs, inclusion of natural gas under the goods and services tax, etc., need to be taken to attract investment.
With inputs from a presentation by Akhil Mehrotra, Chief Executive Officer, PIL, at a recent India Infrastructure conference