The cost economics of the city gas distribution (CGD) sector are changing with the rise in gas prices globally. With the rising gas demand from the transport and household segments, the government is working towards maintaining the supply of gas in the country. In a recent development, GAIL (India) Limited has been mandated to import gas and buy from local, difficult fields to meet the rising demand.
Cost economics of CGD
The CGD business in India targets the industrial, commercial, domestic and transport segments. The overall cost of setting up CGD networks and compressed natural gas (CNG) stations consists of three key components: land cost, gas supply cost and the cost of setting up infrastructure. The laying of a medium density polyethylene pipeline network is a major infrastructural cost component. It is allocated around 55 per cent of the total project cost. Further, the expenditure incurred for acquiring land for city gas stations and CNG stations is another major cost component.
The margin of attractiveness for CNG over petrol and diesel is making CGD entities focus on the CNG segment. According to ICRA, the price differential between CNG and petrol is around 36 per cent, while that between CNG and diesel is around 32 per cent, giving CNG high affordability. However, in April 2022, for the first time in decades, the price differential between CNG, petrol and diesel narrowed. This was due to the Rs 20 to Rs 25 per kg spurt in prices that CGD companies had witnessed in the last few months. With the growing use of expensive liquefied natural gas (LNG), the price difference between automotive fuels is narrowing and CNG is becoming costlier. Nevertheless, the prices of CNG in the month of April 2022 were still lower than petrol and diesel prices.
Another key reason for the narrowing of the price differential is high natural gas prices. Gas prices have been increasing rapidly over the last few months due to the Russia-Ukraine conflicts, which has resulted in a hike in prices in the international market. Additionally, the CGD sector is getting 85 per cent of its allocated gas from domestic gas fields. To meet the shortfall, LNG imports should be increased. However, due to the rising LNG costs globally, imports are decreasing in the country. LNG imports for the month of April 2022 (provisional) were 2,471 mmscm, which is 13.2 per cent (2,847 mmscm) lower than the corresponding month of the previous year. Added to the increasing LNG prices, this has also caused a depreciation in the rupee value. All these costs are then passed on to the consumer, and thus prices are being revised consistently.
To this end, the Indian government recently revised its gas allocation policy. The Ministry of Petroleum and Natural Gas has mandated GAIL (India) Limited to import gas and buy from local, difficult fields to meet the rising demand growth from the household and transport sectors, as cheaper supplies from old blocks are not enough. The buying of gas has to be at the ceiling price set by the government or the actual price, whichever is lower. The current ceiling price of the gas from difficult fields is $9.92 per metric million British thermal unit (mmBtu), lower than the spot prices of LNG, which are around $22 per mmBtu.
New CNG models
Many new business models are being introduced for efficient operations in the CGD industry. With the increasing demand for CNG, CGD entities are adopting the dealer-owned, dealer-operated (DODO) model for setting up stations. Under the general guidelines for the scheme, the entire earmarked dealer plot will be developed exclusively for setting up CNG stations and undertaking allied commercial activities. These guidelines help in reducing the cost of setting up CNG filling stations for CGD entities, while also helping landowners and investors become partners in this endeavour to provide clean fuel for the transport sector.
This model will be the basis for the expansion of CNG fuelling infrastructure across India. More than 4,600 new CNG stations are expected to open over the coming years and more than 10 per cent of them are expected to be based on the DODO model. During financial year 2021-22, Bengal Gas Company Limited has set up four CNG stations under the DODO model and plans to set up four additional stations. Further, Mangalore Refinery and Petrochemicals Limited has opened its 25th retail outlet in the country at Brahmavara in Udupi district, based on the DODO model. Adani Total Gas in December 2021 also invited applications from individuals or partner firms for setting up CNG stations for locations such as Ahmedabad, Navasari, Udaipur and Bhilwara, among others.
Another model introduced in the CGD sector is the transportation of LNG from import terminals or small-scale terminals through tankers. These tankers transport LNG to locations that are not connected to the pipeline network. The volume of LNG is 1/600th of the volume of gaseous natural gas. It is economical to transport it in the liquid state via road or rail over short to medium distances. Therefore, this model tends to be more cost-effective for city gas grids as well as liquid-to-compressed natural gas filling stations.
Various alternative models of natural gas are also being introduced in the country. These include hydrogen CNG and bio-CNG. Hydrogen-enriched CNG is also viable for use in heavy vehicles that are powered by CNG. It consists of 18 per cent hydrogen with the remaining being CNG. GAIL (India) Limited is working on India’s maiden project for blending hydrogen in the CGD network. It has commenced this first-of-its-kind project at Indore, Madhya Pradesh. The hydrogen-blended natural gas will be supplied to Avantika Gas Limited, one of GAIL’s joint ventures with HPCL, which will then be retailed as CNG to automobiles and supplied as piped natural gas to households in Indore.
Bio-CNG also has a calorific value of about 52,000 kJ per kg, which is 167 per cent higher than that of compressed bio-gas (CBG). The potential for compressed biogas production in India from various sources is estimated at about 62 million tonnes per annum. It can help in reducing the dependence on crude oil imports. The Sustainable Alternative Towards Affordable Transportation scheme for CBG aims to produce 15 million metric tonnes of CBG by 2023, from 5,000 plants. Under this scheme, entrepreneurs shall set up CBG plants, and produce and supply CBG to oil marketing companies for sale as automotive and industrial fuels.
Further, while the small-scale LNG (SSLNG) market is at a very nascent stage in India, it offers immense potential to meet the growing demand for environment-friendly fuels from the trucking and shipping industries. Under the SSLNG network, LNG is ferried on smaller trucks from regasification LNG terminals to the liquefied CNG station, from where it is distributed to end-use consumers. It helps supply LNG to areas where traditional infrastructure is not available or to consumers that require liquid fuel.
The government is extensively promoting the adoption of natural gas and increasing its share in the energy basket. With the new gas allocation and transportation policies of the new LNG model, the supply of LNG to CGD operators is expected to expedite the development of geographical areas without pipeline connections. The government is also trying to set up multiple bio-CNG units in the country. It has proposed to generate around 15 million tonnes of bio-CNG, thereby reducing the dependence on imports. W