In the past few years, the case for the use of natural gas as a fuel has become stronger worldwide, and India is no exception. Pressing concerns related to rising air pollution and climate change have prodded the government to commit to lower carbon emissions. To this end, efforts are being made to increase the share of gas, a more environment-friendly fuel, in the country’s energy basket.
City gas distribution (CGD) is one of the key consuming segments of natural gas, and thus has received much policy attention from the government in recent years. To ramp up gas supply, measures have been taken to enhance domestic production. On the demand side, fresh bidding rounds to grant new geographical areas (GAs) have been successfully held. CGD operations in a number of new GAs have commenced. Bigger players such as Gujarat Gas, Indraprastha Gas and GAIL Gas are expanding their presence in new states and cities. A handful of new players have also entered the CGD space.
As the Petroleum and Natural Gas Regulatory Board (PNGRB) prepares to launch the eleventh CGD bidding round, it is worthwhile to take stock of the situation with regard to trends, outlook, gas availability and cost economics for the CGD segment…
Trends and key developments
The CGD segment has been replete with activity during the past couple of years. Licences to develop CGD infrastructure in over 130 new GAs have been awarded in the ninth and tenth bidding rounds together, taking the overall CGD coverage to over half the country’s area.
Infrastructure development: Considering the minimum work programme (MWP) in the newly awarded GAs, piped natural gas (PNG) connections in the country are expected to increase from 5.5 million to over 40 million, and compressed natural gas (CNG) stations are estimated to increase from 1,838 to over 10,000. Plans for the development of new CGD infrastructure involve an investment of about Rs 900 billion, of which projects worth Rs 390 billion have achieved financial closure.
In the past year and a half, over 1.5 million PNG connections and nearly 500 CNG stations have been added to the existing CGD network across the country. Works on newly awarded GAs are under way and operations have commenced in others, including Patna, Daman & Diu, Bhubaneswar, Dadra & Nagar Haveli, Bhopal, Bagpat, Kutch (West), Amreli, Dahod, Dahej-Vagra and Jalandhar.
CGD policy and regulatory scenario: In January 2020, the Ministry of Petroleum and Natural Gas released a draft CGD policy to promote growth in the segment. The policy is a broad framework that could be adopted by states to facilitate CGD infrastructure development. The policy proposes to make CNG/ liquefied natural gas (LNG) the preferred fuel in public transportation and suggests tax breaks and other financial incentives to spur growth in the sector. The document outlines a few suggestions regarding setting up of a committee to help formulate policies and streamline processes for the requisite clearances to develop CGD infrastructure.
Upcoming bidding round: The regulator’s initiatives too are geared towards higher growth and CGD network expansion. In February 2020, the PNGRB released a tentative list of 44 GAs that it plans to offer for CGD infrastructure development. The proposed GAs are concentrated in states such as Tamil Nadu (8), followed by Maharashtra (7) and Madhya Pradesh (6). Areas in other states such as Odisha, Assam, Andhra Pradesh and Rajasthan, among others, are also on the list. The success of the past two bidding rounds (each GA received an average of at least four bids) points towards the fierce competition in the CGD industry, where players are looking to secure/ increase their share in the expanding market.
Gas availability: Domestic production and LNG imports
While some issues in the CGD segment are being addressed through policy and regulatory action, sourcing of gas remains a vexed issue amidst increasing offtake by the expanding CGD industry. Of the overall gas consumption in the country, the CGD segment absorbs 15-18 per cent. During 2018-19, the total gas consumption by the segment was 25.26 million metric standard cubic metres per day (mmscmd). Considering the consumption level of 17.4 mmscmd in 2015-16, the gas offtake by the CGD segment in the past five fiscal years posted a compound annual growth rate of 13.23 per cent. In the past, the share of domestically produced gas has been dominant in the gas sourcing mix by the CGD segment. This scenario has changed in the past three-four fiscal years, with sluggish growth in domestic output and abundant availablility of LNG at softer prices.
Gas production in the country declined during the period 2014-15 to 2016-17, after picking up modestly to 87.83 mmscmd in 2018-19. Robust demand and slow growth in output has increased import dependence, in stark contrast to the government’s vision of reducing the reliance. LNG imports that were at 12-14 million tonnes (mt) about five years back, breached the 20 mt mark in 2018-19.
Favourable cost economics
There is a considerable difference between the price/cost structure of gas and that of other competing fuels. In the household segment, PNG costs at least a rupee less than liquefied petroleum gas (both subsidised and non-subsidised variants) for 1,000 kCal. In the transport segment, the cost of the delivered price of CNG works out to be Rs 5.19 for 1,000 kCal in contrast to that of diesel at Rs 7.24 (Delhi prices). In addition, high taxes imposed on common transport fuels such as petrol and diesel also render gas more competitive. Possibilities for tax cuts on these fuels are also bleak, given the fact that the tax revenue from this source is a vital component of the country’s overall tax collection.
Demand-side aspects like user habits and switching costs clubbed with supply-side aspects like economies of scale (achieved through network expansion and attainment of critical mass) render gas much more advantageous as a fuel.
Industry expectations and outlook
The overall outlook looks promising for the CGD segment, provided regulatory support and cooperation from state governments continue in the times ahead, and CGD companies deliver on their committed MWP targets in a timely manner.
For gas availability, growth in domestic output is expected following the award of new fields under the Hydrocarbon Exploration Licensing Policy regime. The recently conducted Open Acreage Licensing Policy Bid Rounds II, III and IV and the Domestic Small Fields Bid Round II may prove to be a turning point for domestic gas production in the years ahead. Fields awarded under these rounds are expected to correct the declining domestic output as many of these are likely to start producing gas in the next three-four years. By 2024-25, domestic gas production is expected to be around 140 mmscmd.
Till then, LNG sourcing is going to play an important role in meeting gas demand. LNG infrastructure currently under construction will also ramp up the capacity to receive the liquid fuel. While six LNG terminals with a capacity of 39.5 million tonnes per annum (mtpa) are currently operational, another nine terminals with a combined capacity of 33.2 mmtpa are under-construction/proposed. According to industry estimates, overall LNG imports are likely to reach about 126 mmscmd by 2024-25. LNG prices (especially spot prices) too are likely to remain benign in the next three to four years on the back of a global supply glut.
Meanwhile, alternative modes of gas sourcing and transportation have also been emerging lately. The supply of LNG through cryogenic tankers and that of CNG through Type IV cascades is already being tested. While these are technically feasible models, their success can only be evaluated after assessing their life cycle costs based on parameters such as distance, price, infrastructure requirements, number of trucks and round trips required. Besides, for these alternative modes to become the new normal will also call for a new set of regulations that would govern the safe and timely execution of small-scale LNG facilities.
The CGD segment’s gas consumption is expected to display strong growth, and is expected to increase from the 14-15 mmscmd level to about 68 mmscmd by 2025. This will, however, crucially rest on the timely execution of CGD projects that are currently under construction.
In sum
The CGD segment is poised for higher growth, though realisation of CGD infrastructure plans and effective execution of policy and regulatory changes will be key to its success. Equally important will be the need for timely completion of pipeline connectivity projects in the underserved and remotely located GAs. CGD operators could also explore the possibility of setting up small-scale LNG infrastructure for bridging the gas demand-supply gap in the newly awarded GAs.
Overall, the outlook for the CGD segment looks optimistic. In terms of market opportunity, the sector holds immense promise for engineering, procurement, construction contractors, pipe manufacturers, and technology and equipment providers. w
With inputs from presentations by Vivek Jain, Director, India Ratings & Research; K. Ravichandran, Group Head, Corporate Sector Ratings, ICRA; and Nikhil Moghe, Partner, KPMG; at a recent India Infrastructure conference