Conducive Environment

Over the past couple of years, India has witnessed a surge in activity in the gas sector with the successful completion of the ninth and tenth bidding rounds for geographical areas (GAs). The population covered by the city gas distribution (CGD) network is expected to increase to 70 per cent after the completion of GAs awarded under the 10 bidding rounds, up from less than 20 per cent in 2014. In 2018 and 2019 alone, the Petroleum and Natural Gas Regulatory Board (PNGRB) awarded licences for setting up CGD networks in 136 GAs across the country. It is currently preparing to launch the eleventh round of CGD bidding, which is expected to provide access to the clean and economical fuel to another 50-100 districts. Recently, the PNGRB has also come up with a number of noteworthy regulatory measures aimed at facilitating the growth prospects for players in the sector. The government’s ultimate goal is to increase the share of gas in the energy basket to 15 per cent by 2030.

Indian Infrastructure takes a look at the recent regulatory announcements by the PNGRB in the gas sector…

Gas exchange

In July 2020, the PNGRB issued draft regulations for operating gas exchanges in the country for which it sought views and comments from stakeholders. The draft laid out in detail the regulations regarding the setting up and operation of a gas exchange, and membership, shareholding and settlement of trades in the exchange. As per the draft rules, participants at the gas exchange should have gas transport agreements with transporters. Besides, the transportation tariff, if any, will be determined or authorised by the PNGRB and all contracts are necessarily for physical delivery of the fuel. Later, in September 2020, the PNGRB released the final regulations for the establishment and operation of the gas exchange or clearing corporation. The regulator retained most of the provisions of the draft regulation except for a key provision regarding the shareholding limit for a non-member. It has raised the maximum limit for shareholding by a non-member shareholder at any given time from 15 per cent to 25 per cent. These new regulations have paved the way for setting up of the natural gas exchange to facilitate trade of physical contracts and is expected to be an extremely crucial step in developing the gas market. The regulations have also empowered the PNGRB to issue licences to operate an exchange, as well as investigate and cancel licences.

LNG distribution regulations

In a major development, the PNGRB has issued a notice that reinforces the government’s commitment towards the reduction of fuel emissions by increasing the share of liquefied natural gas (LNG) in the country’s energy mix and promoting the use of cleaner fuels. The notice widens the scope of parties that are now eligible to engage in the marketing or distribution of LNG, other than certain authorised entities that already have permission for developing a city or local gas distribution network. It states that any entity can set up an LNG station in any GA or anywhere else, even if it is not the authorised entity for that GA. Thus, the entities that have the authorisation to develop city or local gas distribution networks are not the only ones entitled to distribute and market LNG.

This clarification notice by the PNGRB has resolved the prevailing regulatory confusion over the setting up of LNG dispensing stations and is expected to help companies such as Shell and Petronet that do not have city gas licences but are keen on marketing LNG for transport. Besides, the regulatory clarity is also expected to increase opportunities for state retailers as well as private retailers such as Rosneft-backed Nayara and Reliance BP Mobility Limited, the joint venture of Reliance Industries and BP India.

Unified gas transport tariff

The PNGRB is also working on a unified gas tariff framework to reduce the cost of gas transportation. Some industry players such as GAIL (India) Limited and Gujarat State Petronet Limited have opposed the tariff framework stating that the move will result in cross-subsidisation between clients that are located far from sources of gas and those that are near gas sources, leading the latter to pay more for gas transport costs. However, studies by the PNGRB suggest that the hike in tariff for such customers would not be substantial.

The new framework proposes a relatively simple structure for tariffs wherein a single rate will be applicable for transportation of gas on the same pipeline network within 300 km and beyond, irrespective of the number of pipelines used to transport the gas.

The rationalisation of costs is expected to negatively impact companies for which the exclusivity period for marketing has ended, such as Indraprastha Gas Limited, Mahanagar Gas Limited and Gujarat Gas Limited. However, according to the PNGRB, these players will benefit from the new tariff structure as it will increase affordability for buyers located in far-flung and remote areas of the country.

Force majeure guidelines

In view of the ongoing pandemic, the PNGRB has also issued a fresh set of force majeure guidelines, listing events such as riots, natural disasters and restrictions by the government as conditions for granting more time to complete city gas roll-out obligations. On September 2, 2020, it released a notice on the detailed procedure for considering force majeure claims by CGD entities for a time extension. These guidelines have come after the lockdown imposed to contain the spread of Covid-19 delayed or halted city gas projects. Force majeure is a liability-related clause in contracts which stipulates the event of natural or unavoidable catastrophes that might interrupt the expected course of events and prevent participants from fulfilling obligations. This clause is crucial for CGD entities as they receive a licence to retail compressed natural gas (CNG) and piped cooking gas from the PNGRB on the basis of the committed minimum work programme such as laying of gas pipelines and setting up CNG dispensing stations. Several CGD firms invoked force majeure after work at their sites was stalled due to the lockdown. However, their claims were not immediately accepted in the absence of guidelines listing force majeure events. To address the issue, the PNGRB stated that in the event an authorised entity is rendered unable to perform any obligation as per the work programme due to force majeure, the relative obligation of the entity affected by such a force majeure event will be suspended for the period during which the force majeure event lasts. These conditions include wars, major riots or civil unrest, natural calamities, as well as restrictions imposed by the central or state governments that prevent or delay project implementation.

The road ahead

Despite being hit hard by the pandemic, the gas sector has got back on its feet with the sales volume reaching pre-Covid levels for most of the suppliers. The PNGRB is expected to allow an additional relief period for CGD companies facing delays in project execution due to lockdowns imposed by the government to contain the spread of Covid-19. Issues faced by CGD players with respect to re-mobilisation and availability of equipment, labour and other resources to resume project execution would be taken into account while determining the restoration period. According to ICRA, this will bring additional relief to players executing new projects.

The PNGRB’s recent regulatory measures such as the issuance of force majeure guidelines, relaxation in LNG marketing and distribution regulations, and creation of a gas exchange framework have paved the way for future sector growth. With the launch of the eleventh bidding round, the Ministry of Petroleum and Natural Gas is expecting to attract additional investments needed to achieve growth targets and meet the escalating demand for natural gas. While some key steps have been taken to revamp the policy framework, there is a need for more initiatives to facilitate the ease of doing business in the sector.

Garima Nain

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