The city gas distribution (CGD) segment has witnessed significant progress in the past couple of years. Investments of more than Rs 1.2 trillion are expected to be made for the development of infrastructure in over 130 new geographical areas (GAs) awarded under the ninth and tenth bidding rounds. Further, the Petroleum and Natural Gas Regulatory Board (PNGRB) has introduced several positive regulatory changes to address concerns. The CGD segment is also expected to benefit from the declining natural gas prices, both in India and globally. At a recent India Infrastructure conference, D.K. Sarraf, chairperson, PNGRB, talked about recent regulatory developments, plans and timelines for new bidding rounds and key unaddressed issues…
Recent initiatives to fast-track implementation
In the past two years, the PNGRB has taken several measures to drive investments in the CGD segment. A significant step has been the amendment of bidding criteria for obtaining licences to supply natural gas in cities. The revised regulations, introduced in 2018, lay greater emphasis on infrastructure creation, giving it 80 per cent weightage as compared to zero per cent earlier. The market exclusivity period has also been increased from five to eight years to incentivise participation and provide greater stability to CGD operators. Further, the performance bank guarantee has been capped at Rs 500 million. Predetermined penalties will be levied on CGD players if the physical performance targets are not achieved at the end of each contract year. Moreover, a performance review will be held at the end of three years and the PNGRB will have the right to terminate the licences of underperforming entities.
These new regulations have played a crucial role in generating strong investor interest thereby resulting in the success of the ninth and tenth bidding rounds. A total of 136 GAs were awarded under the two rounds, increasing the country’s CGD coverage from 20 per cent of the population to around 70 per cent. Both the rounds recorded an increase in the number of bids per GA. Progress under the rounds has been good so far and most of the companies have finalised their gas sale agreements. Several big companies have also achieved financial closure. Besides, six to seven GAs that were under litigation have now been awarded.
There has also been a shift in the PNGRB’s role from a regulator to that of a facilitator. The board has engaged with all the stakeholders including pipeline operators and banks to resolve the issues faced by CGD companies. It also holds regular discussions with various state governments to streamline the process of laying pipelines and obtaining faster approvals. A draft policy with guidelines for states has been formulated for faster development of CGD infrastructure.
Upcoming plans
The PNGRB aims to conduct the eleventh round of CGD bidding between April 2020 and August 2020. Around 44 GAs covering 100 districts have been identified for the upcoming round. The regulatory board expects to invite tenders by April 30, 2020. Further, the award of the GAs is expected by end August 2020. Several regulatory changes have been proposed and these will be opened for public suggestions soon.
An important change will be the promotion of supply of natural gas through trucks in areas that lack pipeline connectivity. The gas will be directly supplied from liquefied natural gas terminals. The infrastructure created for the virtual pipeline mode can be easily dismantled and it can be used in other areas once the physical pipeline is laid. A few CGD companies in the country have already adopted this route.
Further, the PNGRB aims to do away with the requirement of a gas sale agreement at the beginning of the licence period. The measure will not only be introduced for CGD players in the eleventh bidding round but also retrospectively for the companies authorised under the ninth and tenth rounds. It is expected to provide flexibility to CGD companies in sourcing gas. The board is also planning to introduce a clause on substitution rights for the lenders as is the case in other sectors such as roads and airports. The move will help in de-risking banks in case the CGD entity defaults.
Additionally, the PNGRB is considering a plan for sharing of infrastructure among CGD companies as GAs grower larger. The change will help the companies reduce their capital costs. The board is also actively working towards the rationalisation of the pipeline tariff structure.
Key issues and challenges
A few perennial issues continue to afflict the CGD segment. A key challenge is the difficulty in obtaining lending support from banks. Some companies also struggle with procurement of equipment such as compressors, pipes and dispensers. There is also a need to develop skilled manpower as activity in the CGD segment accelerates further.