India Brings Gas to its Cities

Extending the city gas networks is a relatively straightforward way to reduce particulate emissions from industrial and domestic premises, so the government is hoping for a good response to its tender for licences to bring gas to more cities.

India is among the major consumers of natural gas and the demand for the commodity is steadily rising. One of the sectors that will play an important role in driving the demand for the commodity in the years ahead is the city gas distribution (CGD) segment.

The success of CDG is important for a government looking to increase the share of gas in the energy mix from about 7% to 15% in the next few years. The CGD business in India comprises three sub-segments: CNG for vehicles; piped natural gas (PNG) for domestic and commercial cooking; and PNG for industrial use. The total number of PNG connections stand at 4.2mn while there are 3.1mn CNG vehicles. As such, India is the world’s third largest NGV market, behind China and Iran, and broadly equal with Pakistan.               

In a bid to expand the area covered by the CGD network, India has embarked on its biggest bidding round for allocating licences. Once this round is complete, almost half of India’s population will be covered, said India’s oil minister Dharmendra Pradhan at the launch ceremony of the ninth bidding round May 8.

India is rolling out networks in 86 new geographical areas covering 174 districts. That will enable CGD coverage in nearly half of India's 640 districts and about half the 1.2bn-strong population. The bidding process is expected to be completed by July 10 and licences are expected to be allocated by October.

The government is hoping for a good response to this latest round given the poor experience of the previous rounds. For instance, the fourth round was completely scrapped, while the response to the fifth was underwhelming. The sixth round for 34 cities in 2015 received only 20 bids, while the seventh, to set up CGD infrastructure in 11 smart cities under the smart city mission received only one bid. 

Seven cities were offered in the eighth round last year but not all have been awarded so far. In all the previous rounds, 91 geographical areas were awarded, covering a population of 240mn. Out of the 91, 56 were awarded through bidding rounds and the rest by government nomination..

Experts believe domestic gas and transportation will be significant drivers of natural gas demand growth. The government is especially focusing on the eastern parts of the country where gas use is much lower than the western parts, thanks to a lack of gas pipelines and LNG import terminals there. 

However, the next few years may see a sharp growth in pipeline network in east India as state-owned Gail is working on an ambitious 2,655-km Jagdishpur-Haldia-Bokaro-Dhamra Natural Gas Pipeline (JHBDPL) project.  

In addition to supplying gas to industries, the pipeline will also provide the relatively clean energy to households in some of the biggest cities in east India. The city gas network-laying activity in Varanasi, Bhubaneswar, Ranchi and Cuttack has already started and activities in other cities, Patna and Jamshedpur, will start soon.

Pradhan said the bid process has been rationalised: unfavourable conditions have been excised and investor-friendly parameters devised to attract serious bidders and to encourage competition. In April, the downstream regulator, the Petroleum and Natural Gas Regulatory Board (PNGRB) announced significant changes to the rules for obtaining licences for CGD and for retailing CNG.

Most concerns addressed 

Under the new bidding criteria, 80% weighting (compared with 0% earlier) is allotted to demand creation. In case of CGD, entities will have to detail how many domestic cooking gas connections will be added in the first eight years of operation. Bidders quoting higher numbers will be given more marks.

Before, transmission tariffs within the CGD system had been the deciding criterion for winning a licence. Under the new rules, this will be given only 10% weighting. Bidders will also be required to quote the length of new pipeline they would lay on winning the licence.

Also, while there was a minimum work programme (MWP) that had to be executed which covered steel pipeline length and the number of domestic connections, the earlier regulations did not provide adequately for enabling the PNGRB to levy penalties for non-achievement of execution targets on an annual basis or for failing to provide a firm service, which has also now been addressed.

The minimum net worth for qualification ranges from rupees 0.5bn, or $7.7mn (for areas with 0.1mn population and lower) to rupees 1.5bn (for areas with 5mn population). For areas with populations over 5mn, it is rupees 0.3bn for every 1mn people.

Previously, the qualification ranged from rupees 0.05bn (0.1mn population) to rupees 1.5bn (5mn population). PNGRB said that entities that had at least one year’s experience of operating and maintaining a CGD network and with sufficient technically qualified personnel would be eligible for bidding. 

According to the new rules, the successful CGD licence bidder needs to enter into a firm natural gas supply agreement with a producer or marketer on the arm's length principle within 180 days of winning a licence. The winning company wins eight years of exclusive gas marketing rights in the given city, which is more attractive than the present five-year monopoly.

ICRA, a rating agency, believes the revised regulation augurs well for the CGD sector and takes care of the anomalies and shortcomings in the earlier guidelines that were proving to be a hurdle. 

"The amended regulation has addressed most of the concerns of the sector. The bidding criteria has been revised such that 80% weightage (compared to 0% earlier) is assigned to infrastructure creation so that gas network penetration is maximised while at the same time, participation of more players is incentivised with the extension of marketing exclusivity period for authorised entities to eight years (extendable up to 10 years) as compared with the five years earlier. This change should push the bidding entities to commit the highest resources to reach the largest number of consumers, which has been a key thrust area of the government,” said senior vice-president at ICRA, K Ravichandran. 

Companies react positively 

Although many companies have not yet started bidding or are still in the pre-bidding stage, they have reacted positively to the changes in the rules. Mahanagar Gas, which is operating in Mumbai and adjoining districts, has said it is keen to expand its operational reach.  

“Almost 86 new geographical areas have been opened up for bidding which is a very good news. Also, on the positive side they [PNGRB] have amended certain regulations with respect to these bidding areas and some encouraging results will be coming on the CGD front,” Mahanagar Gas CFO Sunil Ranade told CNBC TV18 news channel late April. The company is looking to bid for licences across India, but which areas will be shortlisted for bidding will depend on several factors, Ranade said.

Gail Gas, a subsidiary of Gail, is also planning to bid for new licences. A company official speaking to NGW early in May confirmed that Gail Gas would be bidding for licences but he did not provide details of the areas that the company would be bidding. 

At present, Gail Gas has been authorised to implement CGD projects in Dewas (Madhya Pradesh state), Kota (Rajasthan state), Sonipat (Haryana state), Meerut (Uttar Pradesh state), Taj Trapezium Zone (Uttar Pradesh state) and Bengaluru (Karnataka state). 

Even smaller firms have reacted positively to the rule changes and are looking to venture into new areas. Sanwariya Gas, headquartered in the northern Indian city of Noida, has exclusive rights to lay, build and operate infrastructure for supplying natural gas in the city of Mathura in the state of Uttar Pradesh. It now wants to venture into other cities of the state.

“The industry participation that we saw at the roadshow organised by the government in New Delhi on May 8 indicates that this round of bidding will be far better than previous rounds. We are even looking to bid for licences for cities such as Palval, Aligarh, Muzzafarnagar and a few more. In fact, we commenced pre-bidding survey work in Palval and Aligarh before we bid for licences for these areas. Pre-bidding surveys will also start soon for other areas that we plan to bid for,” company director PP Singh told NGW.

For now, the CGD segment in India is highly concentrated, with the top three companies accounting for most of the sales volumes: namely, Mahanagar Gas in Mumbai and adjoining districts, Indraprastha Gas in Delhi and adjoining areas (called the National Capital Region (NCR)) and Gujarat Gas in major cities in the western state of Gujarat.

This means that only Delhi NCR, Mumbai and parts of Gujarat state have a meaningful CGD network in place. Through the latest bidding round, the government is looking to take the network across India and to states such as Punjab, Himachal Pradesh, Haryana, Rajasthan, Maharashtra, Gujarat, Uttar Pradesh, Uttarakhand, Bihar, Jharkhand, Madhya Pradesh, Kerala, Karnataka, Tamil Nadu, Pondicherry, Assam and Tripura.

Strengthening the import infrastructure 

If the latest CGD bidding round turns out to be a success, it will provide a big boost to gas demand in the years ahead. All this demand will need a consistently reliable supply of gas. Since India’s local gas production is not sufficient to meet demand, the south Asian nation will continue to rely on LNG imports to service the demand. There is a belief that LNG import infrastructure will not be sufficient to deal with the rise in LNG imports that is expected to happen in years ahead. 

At the May 8 event, PNGRB chairman DK Saraf said that the LNG infrastructure is bottlenecked and India’s regasification capacity needs to be increased from its present 26mn mt/yr to about 50mn mt/yr by 2022.

However, on the positive side both the government and industry have recognised this problem and are working to strengthen the LNG import infrastructure. Numerous new terminals, both state backed and private, are expected to come online on both seaboards.

India has four operational land-based terminals, all on the west coast. A floating terminal, also on the west coast and operated by H-Energy, is expected to come online by the end of this year. Similarly, several projects are planned for the east coast. 

The Indian government, in a paper released in 2016, sounded confident that India’s regasification capacity will double in the next five years.

Shardul Sharma