Over the last few years, the case for the use of natural gas as a fuel has become stronger worldwide, and India is no exception. Concerns relating to increasing air pollution levels and climate change have pushed the government to increase the share of gas in the country’s overall energy basket. The city gas distribution (CGD) segment is one of the key consumers of natural gas, and it has thus received increased government attention.
As the Petroleum and Natural Gas Regulatory Board (PNGRB) prepares to launch the eleventh round of bidding for CGD licences, Indian Infrastructure takes stock of the current status, recent trends and developments, the impact of Covid-19, the relief measures taken by the board, the key issues faced, and the future outlook for the CGD segment…
The compressed natural gas (CNG) and piped natural gas (PNG) (D) segments have received top priority in the allocation of domestic gas since February 2014. CGD players submit their monthly requirements for these segments and are allocated adequate quantities at domestic gas prices. However, these prices have been declining since the second half of 2019-20. The commercial and industrial segments of PNG [PNG (C) and PNG (I)] are being supplied through imported regasified liquefied natural gas (LNG) sourced from the spot market or through long-term contracts. Upstream companies have demanded that a floor be provided for gas prices determined by the modified Rangarajan formula, as prices continue to remain below the cost of production.
While the CNG and PNG(D) segments are highly competitive due to domestic allocation, PNG(I) is expected to continue to face pressure as it is unable to compete against liquid fuels.
The Ministry of Home Affairs notified natural gas supply as an essential service, enabling it to continue to operate during the lockdown as well. CGD entities were able to receive gas supplies and maintain the supply of gas to all consumer segments.
However, CNG sales fell by 70-80 per cent in the early days of the lockdown, because of which the operators rationalised services by closing up to two-thirds of company-owned, company-operated outlets. Project activities also stopped because of lockdown restrictions and labour migration. As a result, various companies, both individually and collectively, approached the PNGRB seeking extensions in the timelines for meeting their minimum work programme (MWP) targets. Meanwhile, some companies increased gas prices in some geographical areas.
Meanwhile, LNG demand witnessed a surge due to a collapse in spot prices. LNG aggregators faced challenges in marketing term LNG volumes, given the price differential over spot, besides inventory losses on LNG. LNG regasifiers declared force majeure and deferred supplies, further adding to the difficulties.
Nevertheless, the demand from the CGD and industrial sectors, which had declined sharply after the lockdown began in March 2020, has started recovering. Capacity utilisation rates, which had dipped to 55-60 per cent, have now reached 95-100 per cent of the pre-Covid levels. Further, with the gradual easing of lockdown restrictions, the capacity utilisation of transmission lines, which had declined to 30-40 per cent, has now reached 95-100 per cent of the pre-Covid levels.
While gas consumption is now almost at the pre-Covid levels, some delays in project execution are expected owing to the restrictions on the movement of men and material, the need to adhere to social distancing rules, and the emergence of second and third waves of Covid in some areas.
On November 5, 2020, the PNGRB allowed timeline extensions to 41 CGD companies setting up projects in 185 geographical areas for the completion of MWP commitments. The board considered 69 days as the centrally imposed lockdown period, and 60 days as the restoration period. While most of the 185 entities received a basic extension of 129 days only, 38 entities, largely at locations that had longer state-enforced lockdowns, received extensions ranging from 136 to 251 days. Considering the strict penalties that can be imposed for delay in executing MWP, these fairly limited and case-by-case extensions should ensure that players do not get complacent regarding their targets.
Extending a helping hand Of late, the PNGRB has taken a number of initiatives to develop and sustain the growth of the CGD segment. Some of the recent regulatory developments are as follows.
Unified tariff regime with pooled tariff approach
In October 2020, the PNGRB implemented the unified tariff regime with the aim of reducing the distance-based tariff dislocation in natural gas pricing. Accordingly, the pipeline network was divided into two zones: Zone 1 would cover the first 300 km from the injection point, and Zone 2 would cover everything thereafter. The tariff rate in Zone 1 would be 40 per cent of that in Zone 2. Further, the transmission tariff for the majority of players utilising single pipelines, whether in Zone 1 or Zone 2, would witness an increase, while consumers located in Zone 2 and receiving gas flowing through multiple pipelines would benefit, with their tariff rates expected to be moderated by around 40 per cent.
New open access regulations
On November 27, 2020, the PNGRB released the final regulations for the determination of transportation rates for CGD. The regulations have kept most aspects of the access code unchanged, except for providing further clarification on open access. The PNGRB has clarified that the existing CNG stations of franchises/ dealers, including the CNG/liquid-to-CNG (LCNG) stations of oil marketing companies (OMC), will not be considered as third-party shippers for the purpose of allowing access. While any additional capacity expansion at the existing premises will also not be considered as third party, setting up of CNG compressors at new liquid fuel pumps will be considered third party. Major CGD players such as Indraprastha Gas Limited (IGL) and Mahanagar Gas Limited have a significant portion (>50 per cent) of their CNG stations on OMC networks. Thus, this regulation significantly reduces the risk of third-party competition and margin contraction for them.
Nevertheless, the risk of third-party marketing will continue to remain for large industrial PNG markets catered to by players such as Gujarat Gas in Gujarat, given the large price-sensitive market and the access to multiple gas sources in the vicinity. However, the impact will be limited, as only a maximum of about 20 per cent of customers can shift to a third party.
Mandatory switch to PNG by industrial units in Delhi
On December 22, 2020, the Ministry of Environment, Forest and Climate Change (MoEFCC) identified about 1,644 industrial units spread across 50 industrial areas in Delhi that are to switch over to PNG owing to the high levels of pollution. This directive from the MoEFCC will provide a boost to the industrial volumes of the incumbent, IGL. Additionally, with several cities in northern India such as Jodhpur, Jind, Gurugram, Agra, Ghaziabad, Lucknow and Varanasi featuring among the 20 most polluted cities globally, other state pollution control boards may follow suit, benefitting the incumbent CGD entities in these cities. Earlier, in October 2017, the Supreme Court had banned the use of pet coke and furnace oil in the NCR to control pollution levels.
While some issues in the CGD segment are being addressed through policy and regulatory actions, the segment continues to be marred by a gamut of other issues as well. The key ones include the slow pace of approvals, a shortage of skilled manpower, overbooked contractors and suppliers, and different VAT rates across states. Besides, competition from electric vehicles, especially in the state transport bus segment, poses significant challenges for the CGD segment.
What lies ahead
CNG demand in the country is expected to increase, driven by favourable economics and a preference for personal mobility. With regard to PNG volumes, while PNG(D) consumption is expected to increase in light of an aggressive roll-out to meet targets, PNG(I) volumes have started witnessing a gradual recovery with the resurgence of industrial activity. Meanwhile, PNG(C) volumes are expected to remain subdued due to various curbs and restrictions.
Despite the current run-up, spot LNG prices are expected to remain low over the medium term, which should spur demand. Several CGD projects are at the cusp of increasing offtake substantially after two to two and a half years of setting up networks. Moreover, LCNG stations are increasingly becoming a viable option for servicing off-grid locations, especially faced with Covid-induced delays and overbooked contractors.
Going ahead, the sector will offer significant opportunities for CGD companies. The sector is expected to witness a growth of 7-8 per cent as compared to the 2019-20 levels, as 2020-21 has been an irregular year. w
Based on a presentation by Prashant Vasisht, Vice-President and Co-Head, Corporate Ratings, ICRA Limited, at a recent India Infrastructure conference