Natural gas has a huge role to play in the world economy. India has set a target of raising the share of natural gas in its energy mix to 15 per cent by 2030, from the current 6.3 per cent. The share of gas in India’s energy mix is significantly low compared to the global average of 32.9 per cent, except in Gujarat, where gas accounts for 23 per cent of the energy mix. Due to the Russia-Ukraine crisis, the gas sector has been facing global disruptions in recent times.
Alongside support in the form of licensing rounds and pricing reforms, the Government of India is investing in infrastructure development for the city gas distribution (CGD) sector. After the completion of the 11th and 11A CGD bidding rounds, the CGD network could potentially cover 98 per cent of the population and 88 per cent of the geographical area of the country. The total natural gas consumption in October 2022 stood at 4,702 million metric standard cubic metres per day (mmscmd). The key sectors that consume natural gas in the country are fertilisers (37 per cent), CGD (20 per cent), power (13 per cent), refineries (5 per cent) and petrochemicals (2 per cent). The government gives highest priority to the CGD segment in gas allocation.
Geographically, the consumption of natural gas is well distributed across the country. However, the northern, western and southern parts of the country consume more natural gas than the central and south-eastern parts. Going forward, it is expected that the northern and eastern regions will witness growth in the consumption of natural gas owing to their increased infrastructure connectivity.
Technological and digital interventions
Technology is expected to act as an enabler for the CGD segment. Integrated network management, along with technological advancements, is bound to increase operational efficiency, reliability and customer convenience. Supervisory control and data acquisition (SCADA) has been steadily adopted by CGD companies. It enables remote monitoring and automation of CGD processes and equipment. It accomplishes this by integrating with networks, programmable logic controllers, remote terminal units, and sensors and equipment, to collect, analyse, translate and display real-time data. Mahanagar Gas Limited (MGL) has deployed one of the best SCADA systems for operating its compressed natural gas (CNG) stations. Further, it has SCADA-enabled valves, which allow monitoring of the pipeline network. Apart from this, MGL is working on developing systems that enable customers to track the queues at CNG stations, book slots for gas filling, etc. Plans to fully automate all of its CNG stations are also under way.
While many CGD operators have taken up to a decade to start implementing SCADA, AG&P Pratham deployed SCADA right at the beginning. As of December 2022, the CGD operator has nearly 100 CNG stations connected to its SCADA system. AG&P Pratham has also deployed a driver-behaviour management system, under which all its CNG-carrying vehicles have been fitted with six cameras each. Of the six, one is equipped with artificial intelligence to alert the company in case of any violation on the driver’s part. AG&P also plans to fit gas-actuated valves across its entire trunk pipeline network to ensure a ready supply of gas. It also has a digital construction and quality module to capture the entire process of laying a pipeline network, enabling the company to acquire real-time data of its construction.
CGD operators are also adopting smart metering to help achieve the industry’s long-term growth objectives, and enable transparency. Smart metering helps operators make data-driven and accurate business decisions. It also increases operational efficiency and decreases downtime, thereby improving customer service and satisfaction. The adoption of smart meters is a win-win scenario for both consumers and operators, as it ensures timely billing of services, effective revenue collection and an enhanced consumer experience.
Impact of price increase
The domestic gas price has witnessed a significant increase from $2.90 per metric million British thermal units (mmBtu) during October 2021-March 2022 to $8.57 per mmBtu during October 2022-March 2023. The increase in the natural gas price has hugely impacted CGD operators. With sales declining by 10-20 per cent, it has become tough for operators to maintain margins. Companies have reported losses in sales in some areas. The trust of the consumer is also declining owing to the decreasing price differential. According to industry experts, it will be very difficult for companies to sustain themselves without making profits.
As suggested by the Kirit Parikh Committee, domestic gas produced from legacy and old fields, which is priced via the administered pricing mechanism, will have a floor of $4 per mmBtu and a cap of $6.5 per mmBtu. The cap will rise by $0.5 every year. CGD operators expect some relief if the suggestion is approved.
Impact of electric vehicles
Given its aim of decreasing its dependence on imported energy and shifting towards a sustainable future, India is experiencing a surge in the adoption of electric vehicles (EVs). The energy needs of the mobility sector will require the introduction of more types of biofuels. However, the growth of the EV market is not likely to impact the gas market. Although some percentage of the business is expected to shift from the CNG segment to EVs, it is expected to be confined to particular areas. The EV market poses more of a threat to the petrol and diesel sectors. In the coming 20-30 years, the EV market is not expected to encroach much into the gas sector’s market share. That being said, a holistic approach is required to ensure that customers are satisfied.
One of the key challenges faced by CGD operators is establishing a pipeline network along roads, developed and densified areas. The ageing of an existing pipeline network is another challenge. Moreover, the sector lacks a streamlined and organised mechanism for obtaining approvals. This, in turn, leads to project delays and cost overruns, posing a major challenge. Yet another challenge faced by the sector is the lack of clarity regarding the exclusivity period and non-inclusion of the gas sector in the goods and services tax (GST) regime, which has an adverse impact on the pricing of gas, as it leaves gas producers to handle the taxes.
The road ahead
Despite facing various challenges, the sector shows a positive outlook with respect to growth, buoyed by government support. The total gas demand from the CGD segment is expected to grow from 33.7 mmscmd in 2020-21 to 85.6 mmscmd in 2029-30, at a compound annual growth rate of 9.77 per cent. At present, gas is a captive market on the CGD front. It is essential that more areas are explored to generate further revenue. Some initiatives that can be taken by gas operators are increasing the gas volumes of CNG and PNG, exploring infrastructure monetisation and non-fuel revenue options, and creating an EV charging infrastructure. It is important for CGD companies to look into new, high-margin revenue areas to flourish. On the regulatory front, it is essential that gas is brought within the ambit of GST to help determine fair pricing. There is also a need to ensure clarity with respect to the exclusivity period for CGD companies.
CGD companies have planned huge investments for infrastructure development in the segment. Bharat Petroleum Corporation Limited (BPCL) plans to invest nearly Rs 150 billion in the CGD segment in the coming five to six years. Meanwhile, GAIL Gas Limited has planned to invest nearly Rs 120 billion over a span of eight years. Of this, Rs 40 billion has already been invested in the development of infrastructure in its authorised geographical areas. Indian Oil Corporation Limited, another industry giant, also has plans to make investments to the tune of Rs 200 billion in the next five to eight years.
Based on a panel discussion between Anilkumar, Head, Gas Business Unit, BPCL; Kapil Kumar Jain, Chief Operating Officer, GAIL Gas; Srinivasan Murali, Senior Vice President, Operation and Maintenance, MGL; Amlan Talukdar, Vice President, Operations, Haryana City Gas Distribution; Anant Rubade, Vice President, Technical Services, AG&P Pratham; and R.K. Zutshi, Chief General Manager (CGD), IOCL