Can India become a gas-based economy? Hope in the pipeline

In 1857, when Oriental Gas Company started piping coal gas to households and commercial establishments in erstwhile Calcutta, India’s Independence movement was still a pipe dream.


In the century and half since, while the freedom movement has come to fruition, city gas distribution still remains a pipe dream. To date, piped gas is available only to 19 per cent of its population, and geographically the distribution network covers just 11 per cent of the country’s expanse.


In this context, the ninth round of bidding for City Gas Distribution (CGD) kicked off by the Petroleum and Natural Gas Regulatory Board (PNGRB)  on April 12 offers the country another shot at achieving the long-running dream of moving towards a gas-based economy. As many as 406 bids were received for 86 geographical areas on offer and about 38 companies are vying for these contracts to supply eco-friendly cooking fuel (Piped Natural Gas) to households and transportation fuel in the form of Compressed Natural Gas to fuelling stations.


Though corporations are upbeat about the potential the current round of bidding holds, experts are not so optimistic. At present, city gas network is available in 91 geographical areas, catering to about 4 million piped natural gas (PNG) and 3 million compressed natural gas (CNG) consumers.


What explains the limited optimism?  “Although the long-term potential of the business in many of the offered cities and towns has drawn this interest, investors are well aware of the challenges like long ramp-up time for demand, uncertainties around domestic gas availability at reasonable prices, lack of gas infrastructure in many places, difficulties with right of way in crowded cities and vendor ecosystem,” says Debasish Mishra, partner at Deloitte Touche Tohmatsu India.  A big worry also is the long waiting period before investments start to yield results.


Availability of gas is another concern. This is reflected by the low share of natural gas in India’s energy mix at 6.2 per cent against a global average of 24 per cent. Share of gas has declined from 10.5 per cent in 2013, despite a push from the current government to increase supply. For many of India’s neighbours, including Pakistan, the share of gas is around 50 per cent. This means, unless domestic gas production increases, these new CGD areas will have to depend on imported liquefied natural gas (LNG). Currently, LNG comprises 50 per cent of the gas sold in India, up from 19 per cent in 2011.


Since, the price of imported LNG is higher by $5 to $ 8 than domestic gas, this could lead to a significant reduction in margin of companies. However, with more LNG coming to India, prices may drop in the future.


Delays in laying pipelines could slow the progress further. Rahul Chopra, managing director of Haryana City Gas, says new bidders may face some supply chain issues due to a lack of proper infrastructure. Pipeline networks like the one planned by Reliance Industries in South India did not materialise due to lack of availability of KG-D6 gas. Interestingly, even existing pipeline networks are running at just 45 per cent of their carrying capacity as there is not enough gas available. However, with new CGD coming along with more imports of LNG, these pipelines are expected to get a fresh lease of life.

The response to the current round of bidding though shows promise. In the current round, major companies include Gautam Adani-led Adani Gas and government companies such as Indian Oil Corporation, Bharat Petroleum Corporation, Hindustan Petroleum Corporation, Gail Gas, Indraprastha Gas and Mahanagar Gas.


“The current round itself will cover 29 per cent of the population and 24 per cent of the area. Based on the current road map, gas distribution in these areas is likely to kick off by April 2019,” Petroleum and Natural Gas Regulatory Board Chairman D K Sarraf told Business Standard. The round is also likely to attract infrastructural investments to the tune of Rs 700 billion.


Other major private sector players who are in the race are: Subhash Chandra-led Essel Group, Sudhir Mehta-led Torrent Group, Haryana City Gas, Cadilla Group company IRM Energy, Megha Engineering and Hiranandani Group. Adani group was the most aggressive by bidding for 32 areas by itself and putting joint bids with Indian Oil Corporation for another 20.


Andhra Pradesh received the most number of bids at 15 bids; while 14 bids each were received for Jhajjar district in Haryana and Alwar and Jaipur districts in Rajasthan. Interestingly, 10 or more bids were received for 10 geographical areas, while 12 geographical areas have attracted a single bid.


According to sources close to the development, PNGRB is expected to award areas for successful bidders after financial evaluation next month. During the current round, PNGRB has kept a floor tariff of Rs 30 per million metric British thermal unit (MMBTU) for city gas and Rs 2 per kilo gram for CNG. In addition to this, bidding criteria was also revised giving 80 per cent weightage to infrastructure creation, compared to 0 per cent earlier, to maximise gas penetration.


India’s energy consumption is expected to grow 4.2 per cent and gas consumption 5 per cent per annum till 2040. Which will amount to 11 per cent of the world’s energy consumption, according to an Ernst & Young report.


Through the current round of bidding, city gas distribution volumes are expected to increase from 25 million metric standard cubic metres per day (mmscmd) to 50 mmscmd in five years. If this target is achieved, the share of gas in the country’s energy basket could reach 15 per cent. That’s a long way off the target, but progress nevertheless. 

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