Sei sulla pagina 1di 104

Investment Prospects in City Gas Distribution in India

TABLE OF CONTENTS Natural Gas Overview in India ____________________________________________________ 3


Introduction: _______________________________________________________________________ 3 Existing State of Affairs of Natural Gas in India: __________________________________________ 13

City Gas Distribution Overview ___________________________________________________ 38


Fundamentals of City Gas Distribution: _________________________________________________ 38 Evolution and Development of City Gas Distribution in India: _______________________________ 46

City Gas Distribution Market in India ______________________________________________ 52


Profile of Players in City Gas Distribution _______________________________________________ 52 Bidding Strategies of Players _________________________________________________________ 76 Trends and Future Demand Estimates of CGD ___________________________________________ 77 Demand side issues in CGD Business ___________________________________________________ 79 Sources of Supply and Future Supply Outlook for CGD ____________________________________ 80 Supply side issues in CGD ____________________________________________________________ 81

Regulatory Aspect of City Gas Distribution _________________________________________ 83


Regulatory Framework of PNGRB Act __________________________________________________ 83 Source: PNGRB & Infraline ___________________________________________________________ 88 Pricing of CNG and PNG _____________________________________________________________ 88 Legal Framework of Natural Gas Sector in India __________________________________________ 92

Taxation Issues Related to City Gas Distribution ____________________________________ 100


Fiscal aspects in CGD ______________________________________________________________ 100

Global Practices in City Gas Distribution __________________________________________ 102

List of Tables Table 1: Comparative Primary Energy Consumption of India and China ________________ 14 1

Investment Prospects in City Gas Distribution in India

Table 2: Estimated Sector-Wise Demand___________________________________________ 19 Table 3: Industry-wise Offtakes of Natural Gas in India ______________________________ 20 Table 4: Source-wise Availability of Natural Gas as on _______________________________ 22 Table 5: Natural Gas Production for India, China and Pakistan _______________________ 23 Table 6: Demand Scenario of Natural Gas in India __________________________________ 25 Table 7: Expected Domestic Availability of Natural Gas as on June 2010 ________________ 26 Table 8: Expected R-LNG Availability_____________________________________________ 26 Table 9: Domestic Gas Supply Outlook (billion cubic meters) __________________________ 27 Table 10: India LNG Imports by Country (bcm) _____________________________________ 27 Table 11: India LNG terminals, existing, under construction and planned _______________ 28 Table 12: Details of CNG supplied by JVs of GAIL (As on July 2009) ___________________ 39 Table 13: List of 13 Cities identified by GAIL under the directives of Supreme Court _______ 41 Table 14: Growth in PNG consumers in last 5 years _________________________________ 43 Table 15: Benefits of CNG and PNG ______________________________________________ 44 Table 16: Timeline of City Gas Distribution Business in India _________________________ 47 Table 17: Authorization Status of Entities __________________________________________ 47 Table 18: Entities Other Than Gail JVCs in CGD Business ___________________________ 48 Table 19: Investments made by GAIL/JVCs for CGD Projects (As on April 2009) __________ 49 Table 20: CGD Likely Roll Out Plan (as in April 2009) _______________________________ 50 Table 21: Present City Gas Consumption in India (As in April 2009) ____________________ 51 Table 22: CGD Infrastructure of Key Player in India ________________________________ 53 Table 23: Year-wise commitment during exclusivity period Delhi _____________________ 56 Table 24: Year-wise commitment during exclusivity period Mumbai & Greater Mumbai___ 58 Table 25: Year-wise commitment during exclusivity period Kanpur & Bareilly __________ 59 Table 26: Year-wise commitment during exclusivity period Hyderabad & Vijayawada _____ 61 Table 27: Year-wise commitment during exclusivity period Indore & Ujjain City _________ 63 Table 28: IGLs Year-wise commitment during exclusivity period Agra ________________ 64 Table 29: Year-wise commitment during exclusivity period Mathura___________________ 65 Table 30: Snapshot of Winners in Round One CGD Bidding __________________________ 68 Table 31: Winners of Round 2 Bidding4 ___________________________________________ 71 2

Investment Prospects in City Gas Distribution in India

Table 32: Sector Wise Gas Demand Projections (2007-012) ___________________________ 79 Table 33: The total cost of gas sold suffered by ONGC on supplying APM gas (2006-09) ____ 82 Table 34: Gas Price Differentiation on the Indian Gas Market (2010) ___________________ 82 Table 35: CNG Price as on April 2009_____________________________________________ 90

List of Figures

Figure 1: World Primary Energy Demand by Fuel_________________________________ 4 Figure 2: World Fossil Energy Production by Region in the Reference Scenario ________ 5 Figure 3: CO2 Emission per Fossil Fuel _________________________________________ 6 Figure 4: U.S. Energy Related Carbon Di-oxide Energy Related Emissions by Fuel ______ 7 Figure 5: Non OECD Industrial Sector Energy Consumption ______________________ 7 Figure 6: Crude Oil Price Trajectory During January 2005 January 2009 ____________ 8 Figure 7: Total Investment Plans of 50 Leading Oil and Gas Companies______________ 10 Figure 11: Energy Policy Administration in India ________________________________ 18 Figure 12: Natural Gas Reserves in India, China and Pakistan _____________________ 19 Figure 13: Break-up of Industry-wise Offtakes of Natural Gas in 2008-09 for _________ 21 Figure 14: Sector-wise average daily supply (MMSCMD) __________________________ 23 Figure 15: Evolution of Gas Demand __________________________________________ 24 Figure 16: Gas Pipelines in India _____________________________________________ 29 Figure 17: Comparison of CNG with other fuel __________________________________ 39 Figure 18: A typical City Gate Station __________________________________________ 44

Natural Gas Overview in India Introduction: 3

Investment Prospects in City Gas Distribution in India

Natural gas1 is the fastest growing component of primary energy consumption of the world and a preferred fuel among its alternatives due to environment and cost advantage. Natural gas is cleaner than other fossil fuels like coal and oil and cheaper than other renewable energy sources like solar, wind, hydro and so on. Also Reserve-to-Production ratio2 of gas is 63 as compared to oil which is 463. Natural gas is regarded to be the fuel of this century due to its multifarious benefits to various stakeholders. In case of India the ratio comes to about 28.4, while that of world is 62.8. As shown in Figure 1 below fossil fuels have a maximum shared in worlds primary energy demand, with coal, oil and gas increased by almost 77 percent during 2007-30 period. The increase in natural gas demand after 2007 is more than that of in oil.
Figure 1: World Primary Energy Demand by Fuel 6000 5000 Coal 4000 3000 2000 1000 0 1980 2000 2007 2015 2030 Oil Gas Nuclear Hydro Biomass & Waste Other Renewables

Source: World Energy Outlook, 2009

These fossil fuels will be more produced and consumed by Non-OECD countries than OECD countries (Figure 2). More than 95% of the increase in production, in energy value

Natural Gas is a gaseous form of petroleum consisting of mixtures of hydrocarbon gases and vapours, the more important of which are methane, ethane, propane and butane; gas produced from a gas well. 2 Reserves-to-production (R/P) ratio The ratio is arrived at by dividing the reserves remaining at the end of any year by the production in that year. The resultant figure will be the length of time those remaining reserves would last if production were to continue at that rate. 3 BPs Statistical Review of World Energy 2010

Investment Prospects in City Gas Distribution in India

terms, comes from non-OECD regions (where most low-cost resources are located), compared to about 94% over the previous quarter of a century4.
Figure 2: World Fossil Energy Production by Region in the Reference Scenario

Reference scenario of International Energy Outlook 2010 (IEO-2010), indicates the consumption of natural gas been increased worldwide from 108 trillion cubic feet in 2007 to 156 trillion cubic feet in 2035. Though there was a fall in total natural gas consumption and production during 2009 due to recession resulting from slowdown in manufacturing activities. As the world is starting to recover from the memories of oil shock during July 2007 and economic downturn, the demand for natural gas worldwide has started showing an upward trend, mostly in Non-OECD countries like India, China and Middle East. Lesser emission from natural gas (Figure 3) as compared to other fuel like coal and crude will also play a significant role widespread use of natural gas in most of the economic activities in industries, vehicles and household. This rising trend will mostly be seen in developing nation where there will be a significant shift from fuels like petrol, diesel, naphtha; coal etc to a cleaner fuel like piped natural gas used in households and compressed natural gas to be used in vehicles. So there is a market available for natural gas in developing nations to penetrate deeper and compete with its counterparts.

World Energy Outlook 2009

Investment Prospects in City Gas Distribution in India

Figure 3: CO2 Emission per Fossil Fuel

Source: US EPA, EIA

Worlds energy related carbon emission according to reference scenario in IEO-2010 indicates a rise from 29.7 billion metric tones in 2007 to 42.4 billion metric tones in 2035. This rise is mostly due to economic growth and growing dependency on fossil fuels. Emission from natural gas (Figure 4) is regarded to be the least5 among all other fossil fuels making it an attractive choice of Greenfield power plants, which also help it to save upon its capital cost. The carbon emissions from coal and oil are 12.5 billion metric tones and 11.3 billion metric tones respectively, while that for natural gas it is 5.9 billion metric tones in 20076.

5 6

International Energy Outlook 2010, EIA Ibid

Investment Prospects in City Gas Distribution in India

Figure 4: U.S. Energy Related Carbon Di-oxide Energy Related Emissions by Fuel in IEO 2009 and IEO 2010, 2007, 2015, 2035 (Billion Million Tones)

Source: International Energy Outlook 2010, IEA

The growth of natural gas consumption in Industrial sector will be the maximum in NonOECD nations, if reference case scenario (IEO 2010) is to be considered7 (Figure 4).
Figure 5: Non OECD Industrial Sector Energy Consumption by fuel, 2007 and 2025

Source: International Energy Outlook - 2010, EIA

Impact of financial crisis was seen across the sectors, including oil and gas sector. Energy companies in upstream started to drill less oil & gas fields, which resulted in cutbacks in refining and pipeline business too. But at the same time there was a fall in fossil fuel consumption which resulted in lesser emission of carbons, hence cleaner environment,
7

Ibid

Investment Prospects in City Gas Distribution in India

particularly in developing nations. The investment climate in all sub-sectors in oil and gas value chain was low, though the raw materials were available at cheaper prices. This falling investment had its impact on global oil and gas companies, resulting into negative financial performance, forcing them to cut down more on their capital investment. There was a sense of energy insecurity and energy poverty all around, resulting from slack in demand of various sectors. Rising crude oil prices during 2007 (Figure 5) was also considered to be one of the crucial factors beside the housing bubble playing a spoil sport in economic development. Speculations in oil commodities were citied to be the reason behind the rising crude prices. Since October 2008, over 20 planned large-scale upstream oil and gas projects, involving around 2 mb/d of oil production capacity, have been deferred indefinitely or cancelled and a further 29 projects, involving 3.8 mb/d of oil capacity, have been delayed by at least 18 months8.
Figure 6: Crude Oil Price Trajectory During January 2005 January 2009

Speculations resulting into volatile market


160
Cfude oil prices: Dated Brent ($/bbl)

& then a global meltdown


135 120 95 73 53 45 42 145

140 120 100 80 60 40 20 0


Jan- Apr05 05 Jul05 Oct05 Jan- Apr06 06 Jul06 Oct06 Jan- Apr07 07 Jul07 Oct07

115 93 77 99

44

Jan- Apr08 08

Jul08

Oct08

Jan09

World Energy Outlook 2009, IEA

Investment Prospects in City Gas Distribution in India

Energy investment was restricted during this period mainly due to three factors viz. tighter credit availability, lower profitability of various entities and less demand for new capacity creation9. During this period most of the projects were funded off the balance sheet as financing options in the market was restricted to great extent. The burden was clearly visible in the profitability of various companies. Many Initial Public Offers (IPOs) underperformed like that of Reliance Power in India. This crisis on energy investment varied across fuels and nations, which resulted into varying risk and its mitigation strategies and differing corporate responses resulting into varying set of future projection to deal with the crisis. The stimulus packages too were country specific, taking care of adaptability and affordability of its citizens to cope of with this crisis. According to World Energy Outlook analysis, the investments of top 50 leading oil and gas companies in 2009 will fall by 16 percent from $ 524 billion in 2008 to $ 442 billion (Figure 7), as they had to rely more on self financing due to credit crunch. This resulted into higher borrowing cost. National Oil Companies were insulated by the regional governments due to favorable borrowing terms and continued oil bonds as in the case of India.

Ibid

Investment Prospects in City Gas Distribution in India

Figure 7: Total Investment Plans of 50 Leading Oil and Gas Companies

Source: Company reports and announcements; IEA analysis

The impacts of slowdown on investment climate continued till first quarter of the year 2010. New investments in the form of private equity, debt offerings, mergers and acquisitions deals in oil and gas sector, notably declined by 10 percent during this period. Investments declined from $39.7 billion in Q4 2009, to $39.5 billions in Q1 201010. The number of oil and gas deals also fell short from 106 deals to 89 deals during the same
10

Globaldata Analysis

10

Investment Prospects in City Gas Distribution in India

period11. Uncertainties all around with respect to oil and gas prices, coupled with lower energy demand toppled the future plans of most of the companies. Off late the things started to change not only world-wide but also in Asia-Pacific regions including that of India and China. According to IEAs, World Energy Outlook, 2009, the cumulative investment in gas supply-infrastructure by activity, under Reference Scenario, 2008-2030, the share of transmission and distribution accounts for 31 percent, while 51 percent of the investment will be under exploration and development activity. The balance 10 percent will be accounted to be in Liquefied Natural Gas (LNG), of which 63 percent will be in liquefaction, 25 percent in regasification and the balance of 12 percent in transporting LNG. But advances made in hydraulic drilling and a hydraulic fracturing technology has made exploitation of shale gas (a natural gas produced from shale) possible, which has led to an increase in production of natural gas in United States during 2009. The more and more use of shale gas will reduce the greenhouse gas emission, which will certainly increase the current production of natural gas. Natural gas, an important form of worlds energy supply is one of the cleanest and safest fuels, which is odorless, colorless and shapeless in its pure form. It is a combustible mixture of hydrocarbon gas, formed primarily from methane, which can also include butane, propane, ethane and pentane. The typical composition of natural gas and its applications is shown in Table 1 above. Natural gas is like fossil fuel, which is formed when organic matter is compressed down the earth at a very high pressure for a long time. The benefits of this gas are as under: Advantages More environment-friendly compared to oil & coal, due to lesser carbon element, resulting in lesser emissions. With the same amount of heat, natural gas emits 30% less carbon dioxide than burning oil and 45% less carbon dioxide than burning coal. Thereby, improving the quality of air.
11

It is cheap (less expensive than gasoline) therefore, very cost effective. It can be safely stored and burned.

Ibid

11

Investment Prospects in City Gas Distribution in India

Most of the natural reserves are untapped Due to clean burning process, doesnt produce ashes after energy release. Has a high heating value of 24,000 Btu per pound.

Disadvantages Natural gas is a finite source on the Earth and leaves crater in its surface. It is highly volatile (highly flammable) and can be dangerous, if handled carelessly. It is colorless, odorless and tasteless that makes detection of its leak very difficult. In gas pipelines, a substance (contains carbon monoxide) that has a strong odor is added to help detect a leak. But, these substances may be harmful and cause deaths; in fact, natural gas use is the most common cause of carbon monoxide deaths. Constructing and managing such pipelines cost a lot

Gas is produced either as natural gas or in the form of liquefied petroleum gas (LPG). Natural gas can be associated gas (wet gas) as well as non-associated gas (dry gas). Associated gas is produced along with crude oil and so it is called a wet gas while nonassociated gas is produced without oil or with oil which has no commercial value. Associated gas rich is in hydrocarbon, while Non-Associated gas has mostly used in power plants. The natural gas is either transported through natural gas pipelines or by tankers (LNG). Its mode of transportation basically depends on the source of its availability and market. The longer distance is covered by tankers while the shorter one through the trunk pipelines. To this trunk pipelines, city gas distribution pipelines is attached so as to make it available to the end consumers like industries, like power plants, fertilizer companies, commercial units, transportation and for domestic purpose. Both associated and non-associated gas goes to refinery in the form of oil and natural gas liquids respectively for further processing and refining. Hence after this process various kinds of petroleum products like petrol, diesel, naphtha, LPG, are produced and marketed to the consumers through retail outlets. Similarly under LNG value chain there are three sub-sectors viz. upstream (production & liquefaction), midstream (transportation through tankers) and downstream (terminals with associated facilities). Again from this downstream, LNG is re-gasified and transmitted to the end users. 12

Investment Prospects in City Gas Distribution in India

Existing State of Affairs of Natural Gas in India: Indias Share of Natural Gas in Energy Basket Indias share of natural gas stood at 10 percent (Figure 11) as compared to the global average of 24 percent in 2009. The main reason for this was slow pace of gas discoveries coupled with poor pipeline infrastructure. It was only after natural gas finds of Krishna Godavari D6 Basin, the situation seems to change for a good, as reserves increased along with the record production in 2009. This development will surely result into better gas pipeline and city gas distribution infrastructure. Surprisingly natural gas consumption declined world-wide except in the regions of AsiaPacific and Middle East. Russia and Turkmenistan saw the decline in production by 12 percent and 44 percent respectively resulting from a slump in manufacturing activity. U.S. was an exception as its production was the largest in the world for third successive year. In Asia-Pacific, there was an increase by 25.9 percent in the consumption of natural gas, which was one of the highest in the world. And with expected market expansion in downstream sector, will attract more and more investors in upstream sector, despite the later being a gamble. Nations like India and China have started framing strategies to curb on energy emissions or energy intensity, mainly due to the fact of higher price paid for fuel in industries like steel and cement producing companies. The world is just coming out of recessionary period and energy consumers will prefer natural gas among other alternatives, which could be a driving force for entities to invest more into the exploration and production of such fuel. Growth in natural gas consumption was the maximum among all primary energy sources with 25.54 percent in 2009, which was one of the largest in the world (Table 2). While the growth in coal and oil consumption was 6.48 percent and 3.41 percent respectively. The favorable policy and investment climate with regulators in both

upstream and downstream segment of this value chain has contributed to this growth. There has been a growing worldwide acceptance to the fact that the sustained development of any entity or for that matter of a country is possible only if its economic activity takes care of the local environment, which requires collective and collaborative efforts on the part of various stakeholders like government, industries, entities and people at large. 13

Investment Prospects in City Gas Distribution in India

Table 1: Comparative Primary Energy Consumption of India and China

Primary Energy Consumption (MTOE) Oil Natural Gas Coal Nuclear Energy Hydro Electric Total 2008 143.6 37.2 230.9 3.4 26 441.1 India 2009 148.5 46.7 245.8 3.8 24 468.8 % Change 3.41 25.54 6.48 11.76 -7.69 6.28 2008 380.3 73.2 China 2009 % Change 404.6 79.8 6.39 9.01 9.33 2.58 5.21 8.44

1406.1 1537.4 15.5 132.4 2007.5 15.9 139.3 2177

Source: BPs Statistical Review of World Energy, 2010

The prospects of natural gas scenario in India seems to be getting brighter due to reasons like recent Ambani truce, hike in Administered Price Mechanism (APM) price of gas to the tune of $4.2 / mBtu, government allowing downstream regulator to authorize companies for laying natural gas pipelines and permitting oil upstream Public Sector Undertakings (PSUs) to sell gas in market. Investment Trends in India Since Global Recovery

India too struggled to cope up with economic crisis but came up well to recover fast than many developed nations. The impact of economic slowdown was felt is oil and gas sector largely because of high capital intensive nature. NELP-VIII, could be one of the example, where impact of the global crisis been felt. There was a sudden fall in investments by foreign players as well as private players in India as they found the same un-rewarding. Their aspirations were also dented due to continued Administered Pricing Regime of the government as well as the ongoing conflict between Ambani brothers on pricing of gas price, resulting from unclear policy framework of the government. But thereafter things started changing amid global recovery as Indias economy was one of the first countries to recover from this economic crisis in the world12. Year 2009 also marks the turning point for the Indian Gas Market. Before 2009, the estimated potential gas demand was higher than the actual use due the lack of supply, leading to less consumption. To overcome this
12

India Rebounds, Needs to Return to Reform Agenda, International Monetary Fund, February 5, 2010

14

Investment Prospects in City Gas Distribution in India

limitations government came out with some reforms including the New Exploration Licensing Policy (NELP), of which eight rounds has been completed and the last round (NELP-IX) is been announced just few days back. There after regulator was introduced for both upstream sectors (Director General of Hydrocarbons) as well as in downstream sector (Petroleum and Natural Gas Regulatory Board), in order to regulate and function these part of value oil and gas value chain. Director General of Hydrocarbons was established through government resolution on April 8, 1993, while Petroleum and Natural Gas Regulatory Board was constituted under The Petroleum and Natural Gas Regulatory Act, 2006. Then in April 2009, NELP VIII was launched, with a limited success as 76 bids were received for only 36 blocks out of 70 blocks offered. Investors were least attracted mainly due to KG-D6 gas and the 7-year tax holiday issue. But in 2009 clouds on uncertainty started clearing as the government cleared the KG-D6 gas and the prices were fixed by the government, the dispute between Ambani brothers resolved. There was better forecasting done for Indias GDP growth. IEA too raised the gas demand forecast for India at 5.4 percent per annum over 2007-30, (IEA, 2009). The government raised the price of

Administered Price Mechanism (APM) from $ 1.8 / MBtu to $ 4.2 / MBtu while allowing oil and gas public sector companies to sell their gas in the market. This was again an important step to encourage further investment in upstream sector. On September 01, 2010, Minister of State for Petroleum and Natural Gas, Mr. Jitin Prasad, in order to attract upstream investment more, said that India is moving towards the Open Acreage Licensing System (OALP) from current NELP. Under OALP the bidder can bid for blocks on offer during any time in a year and would certainly expected to spur crude investment and they will start getting investment based tax holiday rather profit based. Indian gas market which has seen an unprecedented rise in production and consumption of natural gas in 2009 is at a yet another turning point. The consequence of just increased price of natural gas has to be keenly observed in sector like power and fertilizers which have a priority of allocation among remaining users like city gas distribution, industrial and commercial sectors according to Gas Utilization Policy. This policy was an arrangement by the government resulting from Ambani dispute 15

Investment Prospects in City Gas Distribution in India

on gas utilization, ownership of resources and gas pricing. So the issues and concerns are manifold given the recent developments in oil and gas upstream sector, which will certainly set the pace and structure of investment climate in the downstream sector. Reforms process has brought in private investments in both upstream and downstream sectors, which can remain sustainable and attractive if the regulatory framework is more transparent and obvious. India needs to investment more on energy infrastructure to match the expected energy demand including that of natural gas. Indias transport and energy infrastructure are in a state of disrepair (76th)13. Though public spending is on rise on infrastructural developments but the same has to be improved and overall policy structure should also address this concern. The quality of overall infrastructure ranking for India has got better in 2009-10 than in 2008-09, but still find itself in a competitive disadvantage position ranking 89 in the world14. India is certainly looking up to be placed much better in the Competitive Index in future. Potential market prospects of NG in India According to BPs Statistical Review of World Energy 2010, natural gas production in India has rose by 28.9 percent from 30.5 billion cubic meters (BCM) to 39.3 (BCM) in 2009, registering highest growth in Asia Pacific, far ahead of China which stood at 6.4 percent only. Natural Gas consumption showed the record decline world-wide except Middle East and Asia Pacific. It was highest in India in percentage terms with 25.9 percent increase since 2008 among all other nations. This statistics is a clear indication of growing popularity of this fuel in India and the huge potential of natural gas demand in foreseeable future. The government has announced Ninth offer for exploration blocks under NELP on October 2010. The companies are invited to bid for 34 blocks of which 19 are Onland blocks, 7 are Shallow water blocks and 8 are Deepwater blocks. Though through this round of bidding government is trying to woo foreign investors, but from an investors point of view, model production sharing do not have much for them in store as government has already planned to abolished 7-year tax holiday on natural gas, while making Direct

13 14

The India Competitiveness Review 2009, World Economic Forum Ibid

16

Investment Prospects in City Gas Distribution in India

Tax Code is likely to also abolish this holiday from mineral oil too, replacing it with investment-linked incentive schemes for newly awarded blocks. There how the prospective investors perceive this policy of the government has to be closely monitored. Stakeholders in NG industries: There are five ministries / departments in Indias energy sector, handling policy administration. These are the Ministry of Petroleum and Natural Gas, the Ministry of New and Renewable Energy, Ministry of Coal, Ministry of Power and Department of Atomic Energy (Figure 10). While natural gas sector in India is mostly handled by the Ministry of Petroleum and Natural Gas (MoPNG), the Directorate General of Hydrocarbons (DGH) and the Petroleum and Natural Gas Regulatory Board (PNGRB). The MoPNG oversees exploration and production of oil and gas, refining, including distribution, marketing, import, export and conservation of petroleum products and LNG. This ministry also formulates policies with respect to pricing of petroleum product, bio-fuels, auto fuel, production sharing contract and gas utilization policy. The DGH is broadly responsible for managing the various activities with regard to Indian E&P acreages. They are in terms of awarding blocks, executing production sharing contracts, monitoring developments etc. to promote exploration and management of petroleum and natural gas resources, including non-conventional hydrocarbon resources. The PNGRB, is to regulate refining, processing, distribution, transportation, marketing and sale of petroleum, petroleum products and natural gas excluding exploration and production of crude and natural gas so as to ensure smooth supply of the same to the consumers, while promoting competitive markets to the players engaged in this business. Though the board is independent of ministry but the later can give directions to the former with respect to sovereignty and to maintain or increase the supply.

17

Investment Prospects in City Gas Distribution in India

Figure 8: Energy Policy Administration in India

Government of India

Planning Commission

Ministry of Power

Ministry of Coal

Ministry of Petroleum & Natural Gas

Ministry of New & Renewable Energy

Department of Atomic Energy

6 PSUs, CEA, BEE

3 PSUs

15 PSUs, PPAC, DGH, PCRA, PNGRB*

1 PSU and Several Research Institutes

1 PSU and Several Research Institutes

Source: World Energy Outlook 2007, IEA

Note: PSU: Public Sector Undertaking, CEA: Central Electricity Authority, BEE: Bureau of Energy Efficiency, PPAC: Petroleum Planning and Analysis Cell, DGH: Directorate General of Hydrocarbons, PCRA: Petroleum Conservation and Research Association, PNGRB: Petroleum and Natural Gas Regulatory Board Gas Availability According to the oil minister, Murli Deora, Indias total availability of natural gas, including liquefied natural gas is around 167.8 mmscmd, which is projected to be around 202.97 mmscmd, 256.6 mmscmd and 271.92 mmscmd during 2011-12, 2012-13 and 201314 respectively15. Most of the increase would come when Reliance Industries hikes output from its eastern offshore KG-D6 fields to over 80 mmscmd and the commissioning of LNG import terminal at Kochi in Kerala16. Proved natural gas reserves in India increased
15 16

Natural Gas Availability in India to increase 52 % by 2013-14, Business Standard, August 26, 2010 Ibid

18

Investment Prospects in City Gas Distribution in India

by 2.75 percent from 1.12 trillion cubic metres (tcm), to 1.09 tcm in 200817, mainly due to recent findings in KG-D6 basin by Reliance Industries.
Figure 9: Natural Gas Reserves in India, China and Pakistan

Source: BP Statistical Review of World Energy 2010

Natural gas demand in India is influenced by cost factor and the price of the competitive fuels in various sectors like power, transportation, household, fertilizer etc. In power sector the natural gas has to compete with coal & hydropower, providing subsidized electricity. In transportation petrol and subsidized diesel are immediate competing with natural gas, beside electricity charged vehicles, which just got a huge subsidy incentive in India. In household sector there is subsidized Liquefied Petroleum Gas (LPG). The sector-wise estimated demand for natural gas is show in Table 3 below:
Table 2: Estimated Sector-Wise Demand

Sector
Fertilizers Power Petrochemicals Refineries Steel CGD Total Total (Cumulative including present supply of 140 mmscmd of indigenous gas)

2010-11
1.11 8.22 0.95 22.6 1.48 1.47 35.83 175.83

2011-12
3.43 8.3 0 13.2 1.51 6 32.44 208.27

2012-13
13.44 0 0 11.6 4.861 6 35.901 244.171

2013-14
46.78 60 3.6 2.96 7.279 6 126.619 370.79

Source: Infraline
17

BP Statistical Review of World Energy 2010

19

Investment Prospects in City Gas Distribution in India

Power and fertilizers are core consumers of natural gas (Table 4), with Offtakes 12603 MCM and 9082 MCM respectively during 2008-09. Offtakes in city gas distribution companies was 1535 MCM.
Table 3: Industry-wise Offtakes of Natural Gas in India Industry-wise Offtakes of Natural Gas in India
(1999-2000 to 2008-2009) (Million Cubic Metres) Energy Purposes Captive Year Power tion Indus- Tea Fuel Dome- use/ LPG Shrinkage 199900 200001 200102 200203 200304 200405 200506* 200607* 200708* 200809* 8829 2329 140 250 4840 36 Genera- trial Plan- stic tation Fuel CGD $ Total Fertiliser Industry Non-Energy Purposes % to Grand Total

Petrocals

Sponge Total

Chemi- CNG Iron

Grand Energy Total Purposes

NonEnergy Purposes

16424 8592

666

1203

10461 26885 61.1

38.9

8801

2870

151

335

5004

38

17199 8480

779

1402

10661 27860 61.7

38.3

9214

2979

147

485

5339

70

18234 7957

909

937

9803

28037 65.0

35.0

10510

2939

119

654

5409

136

19767 7955

1027

1215

10197 29964 66.0

34.0

11478

3099

142

93

4865

1263 20940 7889

1128

948

9966

30906 67.8

32.2

12099

3569

142

343

4944

231

21328 8173

1236

38

9447

30775 69.3

30.7

11878

3780

151

75

5048

1120 22052 7762

1175

36

8973

31025 71.1

28.9

11963

3205

170

443

5034

40

20855 8497

1377

639

10513 31368 66.5

33.5

12037

3324

160

39

5618

1258 22436 9822

1432

638

11892 34328 65.4

34.6

12603

5912

154

102

5706

1535 26012 9082

1105

6761

16948 42960 60.5

39.5

Note : * : Provisional @: Excludes Offtakes of Natural Gas by ONGC. : Excludes Gas Supplied to IGL, MGL, Bhagyanagar Gas, TNGCL, BMC & GGCL and sponge iron $ : Sales of City Gas Distribution Companies like IGL, MGL, Bhagyanagar Gas, TNGCL,BMC Green Gas, CUGL & GGCL. Includes Industrial sale, Domestic sale and CNG sale. Source: Ministry of Petroleum & Natural Gas, Govt. of India. (11014)

20

Investment Prospects in City Gas Distribution in India

On consolidating natural gas Offtakes for industrial and non-industrial purpose by adding petrochemicals, fertilizers and sponge iron the following scenario is reflected as show in Figure 11. The chart shows the maximum uptakes by power sector and fertilizer sector with 30 per cent and 22 per cent respectively, during the period 2008-09, while for City Gas Distribution (CGD) it was a meager 4 per cent. And accordingly the government has framed a Gas Utilization Policy given the limited reserves of gas particularly from KG-D6 basin.
Figure 10: Break-up of Industry-wise Offtakes of Natural Gas in 2008-09

1105, 3%

5761, 14% 12603, 30%

Power Industrial

9082, 22%

Tea Plantation Domestic Fuel Captive Use / LPG Shrinkage City Gas

1535, 4% 5706, 13% 102, 0% 154, 0% 5912, 14%

Fertilizer Petrochemical Sponge Iron

Source: Ministry of Petroleum and Natural Gas

With expected increase in the production of KG-D6 basin and new findings the share of these sector will grow, provide government keeps up the pace of reforms not only in upstream sector but also in downstream sector.

21

Investment Prospects in City Gas Distribution in India

Table 4: Source-wise Availability of Natural Gas as on June 2010 Source Daily Average Availability (mmscmd) ONGC OIL Panna Mukta Other JVs R-LNG KG-D6 Total 52.83 5.19 14.59 4.07 32.35 60.00 169.03 Source: Infraline

Natural Gas Consumption The trajectory of Indian gas market has seen a sudden up-swing during the year end 2009, with 25.9 percent growth in its consumption, among all major countries in the world in percentage terms (Table 1). The global natural gas consumption during this period fell by 2.1 percent, mainly due to Russia and other OECD nations, to the tune of 6.1 percent and 3.1 percent respectively. Natural Gas - Consumption (MTOE) China India Pakistan Total Asia Pacific World 2008 73.2 37.2 33.8 433.2 2717.3 2009 % Change 79.8 46.7 34.1 446.9 2653.1 9.4 25.9 1.3 3.4 -2.1

Source: BPs Statistical Review of World Energy, 2010

22

Investment Prospects in City Gas Distribution in India

Natural Gas Production and Supply


Table 5: Natural Gas Production for India, China and Pakistan

Natural Gas Production for India, China & Pakistan (mtoe)

80 Production 60 40 20 0

72.3

76.7

27.5

33.8

35.3

34.1

2008

2009

China

India

Pakistan

Source: BP Statistical Review of World Energy 2010

Natural gas production in India grew by 28.9 per cent from 27.5 mtoe in 2007 to 35.3 mtoe in 2009. While that of China and Pakistan was by 6.4 per cent and 1.3 per cent respectively (Table 8). As far as supply of natural gas is concerned the sector-wise average daily supply as on June 2010 for power is 69.82 mmscmd, for fertilizers it is 38.50 mmscmd, for petrochemicals it is 7.75 mmscmd, while for CGD it is 9.73 mmscmd (Table 9). Figure 11: Sector-wise average daily supply (MMSCMD)
Sector Power Sector Fertilizers Refineries Petrochemicals Sponge Iron City or Local Natural Gas Distribution Network International Consumption - pipeline system Shrinkage for Liquid extraction - LPG etc. Others Total Average daily Supply (mmscmd) 69.82 38.50 16.61 7.75 8.00 9.73 3.64 7.32 7.66 169.03

23

Investment Prospects in City Gas Distribution in India

Source: Infraline Figure 12: Evolution of Gas Demand

MOVERS AND SHAPERS OF GAS MARKETwhere NELP played the most important role in bringing INVESTMENTS & the market moving towards market driven prices.

1974
Gas Demand Picked with ONGCs Bombay High Production

1981
OIL became State Owned Company

1984
GAIL was formed to promote gas & develop midstream and downstream gas infrastructure

1991
Gas Market deregulated in Liberalisation Process

1993
DGH formed to oversee the upstream sector

1997
NELP Started to attract more private players

2006
PNGRB was created to regulate downstream sector

24

Investment Prospects in City Gas Distribution in India

Demand scenario for natural gas


Table 6: Demand Scenario of Natural Gas in India

Source: Integrated Energy Policy

Indias gas market is still regarded to be supply constrained, though the future looks bright in terms of gas demands. Long terms demand projection of natural gas (Table 5) is done by Energy Information Administration (EIA), India Hydrocarbon Vision 2025, Integrated Research and Action for Development (IRADe), Price Waterhouse Coopers (PWC), India Vision 2020 and International Energy Agency (IEA) which has been explained by the expert committee on Integrated Energy Policy. Accordingly, their projections are interpolated or extrapolated to bring them to common years, which have been converted in million metric standard cubic meters per day (MMscmd). But Planning Commission found gross errors in some of the projections, which also failed to consider price sensitivity of gas. Planning Commissions demand estimates on gas was therefore based on following assumptions18. 18

20 per cent of power would be generated using gas by 2031-32 The projected fertilizer capacity by 2031-32 would be gas based

Integrated Energy Policy, Planning Commission of India, August 2006

25

Investment Prospects in City Gas Distribution in India

The remaining end uses of gas will continue to grow at 7 per cent or 8 per cent per annum depending upon GDP growth.

Natural Gas Demand and Supply Projections


Table 7: Expected Domestic Availability of Natural Gas as on June 2010 2010-2011 2011-2012 1.78 11.62 1.83 60.29 0.41 68.74 2012-2013 2.44 9.55 1.39 90.95 3.37 73.1 2013-2014 2.05 8.21 1.19 95.02 5.8 67.57 7.53 2014-2015 2.03 7.29 1.15 98.7 7.36 61.34 13.21 2015-2016 1.65 6.85 1.15 106.68 8.59 55.77 15.23

Small Size (A) Medium Size (B) Pre-NELP (C) NELP (D) CBM (E) ONGC Nominated Firm (F) ONGC (Nominated) Additional Indicated (G) OIL (Nominated) (H) Total (Firm) (A+B+C+D+E+F+H) Total (Optimistic) (Domestic)(A+B+C+D+E +F+G+H)

2.03 14.31 2.11 59.6 0.1 58.86

5.8 142.81

5.8 150.47

5.8 186.6

5.8 185.64

5.8 183.67

5.8 186.49

142.81

150.47

186.6

193.17

196.88

201.72

Source: Infraline Table 8: Expected R-LNG Availability 2011-2012 PLL(Dahej Terminal) HLPL Hazira Dhabol Kochi Total LNG (mmtpa) Total LNG (in mmscmd) 10 2.5 2.5 0 15 52.5 2012-2013 10 2.5 5 2.5 20 70 2013-2014 10 2.5 5 5 22.5 78.75

Source: Infraline

26

Investment Prospects in City Gas Distribution in India

Table 9: Domestic Gas Supply Outlook (billion cubic meters)

Source: MoPNG, Report of the Working Group on Petroleum and Natural Gas Sector for the XI Plan (2007-12), November 2006.

Liquefied Natural Gas (LNG) Imports in India


Table 10: India LNG Imports by Country (bcm)

Source: IEA, Natural Gas Information, 2010

27

Investment Prospects in City Gas Distribution in India

Table 11: India LNG terminals, existing, under construction and planned

Source: Source: IEA, company reports, press releases.

28

Investment Prospects in City Gas Distribution in India

Natural Gas Transportation and Distribution


Figure 13: Gas Pipelines in India

Source: PNGRB

29

Investment Prospects in City Gas Distribution in India

Major Players in Natural Gas Industry


Nature of Company Key Operations Natural Gas related Business
Lubricants, Coal Bed Methane, Deepwater E&P, Trading and Solar Energy Take care of development of gas infrastructure for Dabhol project UPSTREAM Tapti Gas Field & Panna / Mukta Oil and Gas Field DOWNSTREAM Distribution of gas through its subsidiary GGCL in Surat, Ankleshwar and Bharuch in Gujarat

Gas Players

BP International Ltd

One of the largest energy companies in world

British Gas India (BG India)

It is a business of BG Group engaged in exploration & production, LNG, transmission and distribution and power generation

Developing upstream hydrocarbons and downstream infrastructure

Bharat Petroleum Corporation Limited

Government Public Sector Undertaking Basically refining company

Refining of crude and marketing of petroleum products

Having JVs through Petronet LNG Ltd, IGL and Central UP Gas Limited

Cairn Energy

Independent oil & gas co.

Exploration & Production

Stakes in Ravva field, Krishna Godavari Assets, Cambay Basin, Rajasthan Basin

ExxonMobil

Leading oil & gas company

Exploration & Production

Stakes in RasGas, a JV with Qatar Petroleum

Gaz de France

National French Gas Co.

Natural Gas Market covering upstream, infrastructure and trading

Has 10 per cent stake in Petronet LNG Limited

GAIL (India) Limited

Natural gas transmission and marketing company

Gas and LPG transmission Gas based Petrochemicals City Gas Projects Telecommunications Exploration & Production

Natural gas transmission & marketing

30

Investment Prospects in City Gas Distribution in India

Gas Players

Nature of Company

Key Operations

Natural Gas related Business

Gujarat Adani Energy Limited

Wholly owned subsidiary of Adani Group, into natural gas business Indias largest private natural gas distribution company

Natural Gas Distribution

City Gas Distribution

Gujarat Gas Company Limited

Natural Gas Distribution, transmission system, CNG Exploration & Production, CNG

Have a contract with GAIL, GSPCL-NIKO, Cairns for gas distribution GSPC is catering PNG in Gandhinagar and natural gas requirement of the industrial, commercial and residential sector.

Gujarat State Petroleum Corporation Limited

State Owned Company in GSPC Group

Hindustan Oil Exploration Company Limited Hindustan Petroleum Corporation Limited

Private E&P Company

Exploration and Development of oil and gas

Have stakes in NELP blocks in shallow water exploration block JV with Bhagyanagar Gas Limited for distribution & marketing of CNG and Auto LPG

Integrated refining and marketing oil company in India Indias national oil company Formed as a result of MoU singed between BPCL & GAIL

Refining, distribution and exploration

Indian Oil Corporation Limited Indraprastha Gas Limited

Refining, petrochemicals

Importing LNG from Iran

City Gas Distribution

CNG, PNG, commercial and industrial gas

Mahanagar Gas Limited

A JV of BG and GAIL

City Gas Distribution

Distribution of CNG, PNG and gas to industries and commercial units

Niko Resouces Limited

Canadian oil company

E&P business, marketing of natural gas

Largest customer in gas sale agreement Distribution of gas and CBM exploration

Oil and Natural Gas Corporation Limited Oil India Limited

Upstream oil and gas company Upstream oil and gas company

E&P business

E&P business

Distribution of gas

31

Investment Prospects in City Gas Distribution in India

Gas Players

Nature of Company

Key Operations

Natural Gas related Business

Petronet LNG Limited

LNG Supply Company

Transmission of LNG

Has signed LNG Sale and Puchase Agreement with RasGas

Reliance Industries Limited (RIL)

Vertically integrated private oil and gas company

Upstream , midstream and downstream

Exploration of gas: KG-D6 basin, CBM Blocks

Shell Hazira LNG

It is a largest of Shell Group ventures in India

Terminal infrastructure

LNG receiving and storage terminal infrastructure development

Reliance Gas Transportation Infrastructure Limited

A Special Purpose Vehicle set up by RIL

To lay pipelines to interconnect RILs oil and gas sources to their markets

Transmission & Distribution of gas through its pipelines

GAIL Gas Limited

A wholly owned subsidiary of GAIL (India) Limited

City Gas Distribution Network in Dewas, Kota, Sonepat and Meerut

Implementation of CGD projects in India

Source: Infraline and Company Websites

Allocation & Pricing of Natural Gas - Upstream

Natural gas is a scarce resource in India and GoI plays an important role in its allocation. Historically, gas has been allocated in priority to end-users such as fertiliser producers and power plants. In 2007, the GoI started working on a new Gas Utilisation Policy. This was mostly a consequence of the dispute between the Ambani brothers (see further in the Domestic Production section) and the related issues on gas pricing and utilisation, which created a very hot debate in India. This and the large gap between demand and available supplies prompted the government to develop a Gas Utilisation Policy and to go back to administrative control over prices (GoI introduced a price formula for all discoveries under the first six NELP rounds) and over volumes to be allocated to end-consumers. Therefore, in 2008, the government introduced new guidelines called the Gas Utilisation Policy, which effectively took away gas producers' rights to sell the gas they discover on the open market. These guidelines would be applicable for the next five years and be reviewed afterwards. The recent

32

Investment Prospects in City Gas Distribution in India

ruling of the Supreme Court in May 2010 regarding the dispute between RIL and RNRL, reaffirms the role of the government in the allocation and pricing of gas. Currently, the rules of the General Policy for the gas market imply that gas will be allocated according to sectoral priorities set up by the government. This does not imply that the gas is reserved: if one customer is not in a position to take the gas, the next one on the list becomes eligible. Existing users have priority over Greenfield users. The gas is allocated as follows: For existing consumers Fertilizers LPG and Petrochemicals Power Sectors City Gas Distribution Refineries Others The above lists clearly show the preference for fertilizer producers, petrochemicals and power plants as first category customers. CGD usually comes in second position. India has a rather unusual dual gas pricing and supply policy, with APM gas produced by state-owned companies and non-APM gas from private companies and joint ventures (JVs). Until May 2010, prices differed widely from around USD 2/MBtu for APM gas to almost USD 6/MBtu for the most expensive non-APM gas. Such a gap was pushing towards changes. Increasing private supply of gas has been indeed a major policy challenge for the government as the pooling of gas prices was limited by the declining availability of APM gas. Moreover, any effort to keep domestic gas prices low would act as a disincentive for more upstream investment. Two major changes took place in May 2010. APM prices were increased from USD 1.8/MBtu to USD 4.2 MBtu, and ONGC and OIL were allowed to market gas discovered in new fields allocated to them at market prices. This decision will have consequences for producers, and is an important step forward in order to encourage further investments in the upstream sector. Furthermore, if India wants to attract additional LNG in the long term, it would have increasingly to compete on global gas markets at prices potentially higher than the current ones. Meanwhile, the Supreme Court announced its verdict on the five-year battle between 33 For Greenfield consumers Fertilizers Petrochemicals CGD Refineries Power Plants

Investment Prospects in City Gas Distribution in India

Reliance Industry (RIL) and Reliance Natural Resources (RNRL) regarding the price at which RIL was to sell its KG-D6 gas to RNRL: the Court decided that only the government had the right to fix the price in the Production Sharing Contract (PSC) (fixed at USD 4.2/MBtu) when an arm-lengths price is impossible to find. It remains to be seen whether or not such a decision could deter private or foreign upstream investment. Pricing is also key for the demand side due to some sectors limited ability to absorb high prices: gas-fired plants compete with coal-fired plants while fertiliser producers depend on international urea price and government subsidies. A market approach based on comparison with alternative fuels should be taken. Issue of pricing remains crucial both in upstream and downstream development. Pricing of downstream market

Historically, gas markets were entirely serviced by PSU with prices determined by the central government. From 1987 to 2005, production and transport prices were fixed by the Empowered Group of Ministers (EoGM). The APM mechanism for oil was formally phased out in 2002, but most of the gas produced by ONGC and OIL and distributed by GAIL continues to be sold at APM prices. In 2006, the regulator PNGRB was created to set up the bases for a competitive market and has been developing regulations since then. Following table shows the complete set of data on producer and consumer price and transportation charges of Natural Gas/RLNG for the period from January to June 2010 in respect of GAIL, ONGC & OIL is enclosed. In respect of RIL it is stated that the KG D6 gas sold during January to June 2010 to all the customers was @ the price $ 4.205/mmbtu at gas delivery point at Gadimoga, Kakinada. However, the transportation of gas beyond the delivery/ point are arranged by the customers and transportation charges are paid by them directly to the respective gas transporters.
Source of Natural Gas/RLNG Effective Date Producer Price Consumer Price Consumer Price for Power Sector** Transportation Charges along AVJ pipeline 10,000 Kcal/SCM (avg.) General Price ONGC AVG prices 3917 North East 3917 4117 General North East 4500 4117 954 HVJ

34

Investment Prospects in City Gas Distribution in India

OIL PMT Gas Ravva l-KG Basin Ravva SatteliteKG Basin RLNG Dahej & RIL Gas^

for period JanJune'2010

3917 11296 6860

3918 N.A N.A

4117 3917 3917

4501 N.A N.A

4117 3917 3917 954 404

8428

N.A

8628

N.A

8628

404

9791 8333

N.A HA

11450 8666

N.A N.A

11450 8666

954 3389***

* Gas price is Indicated above in units of Rs/MSCM * Gas price for APM has been revised w.e.f 01.06.2010 to S4.2/MMBTU for general consumers and North East $2.52/MMBTU * Gas price for APM for the period Jan-May'2010 was Rs 3200/MSCM for general consumers ** Power sector in the mentioned list comprises of PMT gas out of 5 MMSCMD and remaining sold to Torrent at $4.75/MMBTU and RRVUNL @$4.6/MMBTU * The consumer prices indicated above are basic process including marketing margin and excludes components like transportation and taxes ^ RIL Gas prices assumed as $4.2/MMBTU at Kakinada at calorific-Value of 8100 Kcal/SCM & RLNG Dahej producer price indicated above is ex-ship price while consumer price also includes re-gasification charges, guj VAT etc. Exchange rate considered as 46 * Transportation charges are as per PNGRB notified tariffs for HVJ/DVPL (Rs 25.46/MMBJU) and present applicable tariffs for other regions ** Tpt charges include RGTIL charges @ Rs 65/MMBTU and HVJ/DVPL-Rs 25.46/MBTU

Source: Infraline

35

Investment Prospects in City Gas Distribution in India

Producer and consumer prices and transportation charges on Natural gas/ RLNG for the period from January to June 2010 Price in Rs are per 1000 SCM with NCV of 10.000 kcal/SCM. Price in US$ are per MMBTU (NCV basis) Source of Gas/ RLNG Effective date Producer price APM Consumer Price Consumer price for Power sector Transportatio n charges along HVJ Pipeline @ 10,000 kcal/SCM Genera l ONGC 01.4.200 6 till 31.5.201 0 Rs 3200 Rs 192 0 NE Genera l Rs 3200 Rs 192 0 NE Genera l Rs 3200 Rs 192 0 Does not pertain to ONGC Royalty @ 10% of Producer price payable extra by Consumer . 1.6.2010 onwards $ 4.20 (*) $ 420 $ 2.52 $ 4,20 $ 2.52 Price inclusive of Royalty Consumer not to Pay extra. OIL PannaMukta Tapti 01.4.08 $ 5.57 01.4.08 $ 5.73 Not appl. Not appl. Ravva1 01.4.06 $ 3.50 Not appl. Does not pertain to ONGC May be obtained from GAIL, who is marketing JV gas and administering the Gas Pool Account. ONGC is a JV Partner in these JVs. Price are inclusive NE Remarks

36

Investment Prospects in City Gas Distribution in India

Ravva Satellit e

$ 4.30

Not appl.

of Royalty Consumer not to pay extra

RLNG Dahej RIL

Does not pertain to ONGC

(*) As per Gol order dated 31.5.2010, the producer price of ONGC in NE w.e.f. 1.6.2010 is same as general producer price, i.e. US$ 4.2/MMBTU. Gol to compensate the difference from Central Budget. However, formal instructions on modalities still awaited. Source: Infraine Producer and Consumer price and Transportation charges of Natural Gas for the period Jan'10 to June'10 Mont h Producer PriceGeneral Producer Price -NE States Consumer PriceGeneral For Power & fertilizers sectors Rs./'0 00'SC M Janu ary'1 0 Febr uary' 10 Marc h' 10 April ' 10 1600. 00 1600. 00 2.27 2.22 3200. 00 3200. 00 1.81 1.77 1600. 00 1600. 00 2.27 2.22 1920. 00 1920. 00 1.09 1.06 2304. 00 2304. 00 1.30 56.3 0.03 1.28 53.1 0.02 1600. 00 2.18 3200. 00 1.74 1600. 00 2.18 1920. 00 1.04 2304. 00 1.25 53.1 0.02 1600. 00 $/M MBT U 2.19 Rs./'0 00'SC M 3200. 00 Rs./'0 00'SC M 1.75 Rs./'0 00'SC M 1600. 00 $/M MBT U 2.19 Rs./'0 00'SC M 1920. 00 $/M MBT U 1.05 For Power & fertilizers sectors Rs./'0 00'SC M 2304. 00 $/M MBT U 1.26 Rs./'0 00'SC M 53.1 $/M MBT U 0.02 Consumer Price - NE States Transportati on Charges

37

Investment Prospects in City Gas Distribution in India

May' 10 June '10 Notes:

1600. 00 3142. 80

2.20

3200. 00

1.76

1600. 00

2.20

1920. 00

1.06

2304. 00

1.27

56.3

0.03

4.20

7633. 33

4.20

3142. 80

4.20

4580. 00

2.52

4580. 00

2.52

56.3

0.03

1. Transportation of Natural Gas is provided only to IOCL (AOD). 2. General price is applicable in Rajasthan 3. Rajasthan prices are as per 4000 K Cal and NE prices are as per 10000 K Cal 4. Above prices are without adjustment of Calorific Value, however for the purpose of billing prices are being adjusted with actual calorific value. 5. For calculating price in $/MMBTU, average monthly RBI reference rate has been taken.

Source: Infraline

City Gas Distribution Overview

Fundamentals of City Gas Distribution: Overview of CNG and PNG CNG Overview: CNG stands for compressed natural gas. It is a gaseous fuel, with a mixture of hydrocarbons mainly methane. It is an automotive fuel, which helps in increasing fuel efficiency. This fuel is been promoted by government of India through various tax incentives, so as to cut down on vehicular pollution, thereby making air less polluted (Figure 16). According to Petroleum and Natural Gas Regulatory Board Act, 2006, CNG means natural gas used as a fuel for vehicles, typically compressed to pressure ranging form 200 to 250 bars in gaseous state. The running cost of CNG is less than diesel and petrol. The best e.g. of is that of Delhi, where on the directives of the Supreme Court, all public transport were converted to CNG in a set time frame by Indraprastha Gas Limited (IGL). Till mid 2010 IGL has fueled almost 3.50 lakh private and public vehicles in Delhi and its satellite towns. Moreover this company has been invited by IGU (International Gas Union) to a conference that is being conducted on the sidelines of the climate change 38

Investment Prospects in City Gas Distribution in India

summit to promote use of gas as green fuel19. Delhi has the largest fleet of public transport vehicles running on CNG in the world. The upswing of 30 per cent rise in CNG vehicles is also seen across India from 2009 to 10.1 lakh in 201020.
Figure 14: Comparison of CNG with other fuel

Fuel/Emissions CO2
(gm / 100 km)

UHC 85 21 18 5.6

CO 634 106 168 22.2

NOx 78 108 37 25.8

Sox 8.3 21 0.38 0.15

PM 1.1 12.5 .029 0.29

Petrol Diesel LPG CNG

22,000 21,000 18,200 16,275

PNGRB has estimated the number of CNG vehicles to increase around 5.10 million by 2020, whereas Gas Authority of India Limited (GAIL) estimated the same to be 5 million by 2015. Total number of CNG vehicles is well complemented by the number of CNG stations in Delhi / NCR and Mumbai / Suburbs with 181 and 131 CNG stations as on July 2009 (Table 13). But this has to be increased in the line with projections made by PNGRB and Ministry of Petroleum and Natural Gas (MoPNG), under VISION-2015, wherein 200 more cities are to be provided CNG by 2015.
Table 12: Details of CNG supplied by JVs of GAIL (As on July 2009) Company Indraprastha Gas Limited (IGL) Delhi Noida & Greater Noida Cities Stations 172 9 No. of Vehicles 297194 Source of Gas APM
21

GAIL+RLNG from GAIL & BPCL

Mahanagar Gas Limited (MGL)

Mumbai Thane Mira Bhayandar Navi Mumbai

123 8 3 2 7

192395

APM-GAIL

Maharashtra Natural gas Limited (MNGL)

Pune

1365

APM-GAIL

19 20

http://timesofindia.indiatimes.com/india/Delhis-CNG-rings-bell-at-climate-summit/articleshow/5328774.cms http://www.blonnet.com/2010/11/16/stories/2010111652820200.htm 21 APM price now been increased to $/4.2 MBtu from June 2010, resulting into costlier CNG.

39

Investment Prospects in City Gas Distribution in India

Central UP Gas Limited (CUGL) Green Gas Limited (GGL)

Kanpur Bareilly Lucknow Agra

7 1 4 3

8203 1735 7412 6214

APM-GAIL

APM-GAIL R-LNG-GAIL & IOCL

GAIL (India) Limited Bhagyanagar Gas Limited (BGL)

Vadodara Vijayawada Hyderabad Rajahmundery

3 6 4 1 1

3411 2911 2156 42 909

APM-GAIL APM-GAIL

Tripura Natural Gas Company Limited (TNGCL) Aavantika Gas Limited (AGL)

Agartala

APM-GAIL
22

Indore Ujjain

5 1 Source: Infraline

800

RLNG -GAIL

The cost of CNG is still below petrol and diesel, after the APM prices were raised in June 2010. It is about 62 per cent cheaper than petrol and 30 per cent cheaper than diesel. The cost of running a car on CNG per kilometer would be Rs. 1.31 as compared to Rs. 3.43 on petrol in Delhi. Till CNG is able to compete well with alternate fuels like petrol and diesel, its growth prospects are high and the future looks bright. The recent increase in CNG price by IGL (Delhi / NCR) and MGL (Mumbai & Suburbs) was during mid June 2010. The last increase in CNG price was to the tune of Rs. 27.50 / kg by IGL and Rs. 31.47 / kg in Mumbai. At present there are 76 cities with PNG / CNG infrastructure, in the states of Andhra Pradesh, Assam, Delhi, Gujarat, Haryana, Madhya Pradesh, Maharashtra, Rajasthan, Tripura, Uttar Pradesh, West Bengal and Daman & Diu. Accordingly, GAIL has incorporated JVCs to implement city gas projects in 13 cities (Table14), wherever pipeline connectivity is available. CNG is being supplied to Agra, Lucknow, Kanpur, Pune and Hyderabad. This decision of Supreme Court was due to the rising pollution levels in these cities.

22

RLNG Regasified Liquefied Natural Gas

40

Investment Prospects in City Gas Distribution in India

Table 13: List of 13 Cities identified by GAIL under the directives of Supreme Court

Cities Agra Lucknow Kanpur Pune Faridabad

JVCs / other entities Green Gas Limited Green Gas Limited Central U.P. Gas Limited Maharashtra Natural Gas Limited Indraprastha Gas Limited

Current Status CNG is being supplied CNG is being supplied CNG is being supplied CNG is being supplied MoP&NG has authorized IGL for implementation of CGD projects. However, State Government has not given permissions to IGL and instead issued NOCs to M/s Adani Energy.

Hyderabad

Bhagyanagar Gas Limited

CNG is being supplied by transporting gas in mobile storage cascades from Vijayawada

Ahmedabad CNG being supplied by HPCL and Adani Energy Cities Varanasi JVCs / other entities -

EoI submitted by RGCL to PNGRB.

Current Status EoI submitted by RGCL to PNGRB. Pipeline connectivity from proposed GAIL's Jagdishpur- Haldia pipeline.

Patna

Pipeline connectivity from proposed GAIL's Jagdishpur- Haldia pipeline.

Sholapur

EoI submitted by RGCL to PNGRB. Pipeline connectivity from Reliance East West P/L.

Bangalore

EoI submitted by RGCL to PNGRB. Pipeline connectivity from Reliance East West P/L.

Kolkata

EoI submitted by RGCL to PNGRB. 41

Investment Prospects in City Gas Distribution in India

Pipeline connectivity from proposed Reliance Kakinada - Haldia P/L. Chennai EoI submitted by RGCL to PNGRB. Pipeline connectivity from proposed Reliance Kakinada - Chennai P/L.
Source: Infraline

It has been self evident from the (Table 15) that the rise in CNG activities in India from April 2005 to April 2009 has been manifold, justifying that this sector has a robust market, which can boom in next five years at least. Since 2005, new states, cities and companies have increased till now. There has been an addition of Uttar Pradesh, Andhra Pradesh, Tripura and Madhya Pradesh in 2009 to an old list covering 11 more cities. These cities were Lucknow, Agra, Kanpur, Bareilly, Vijayawada, Hyderabad, Rajahmundry, Agartala, Indore and Ujjain covered by GAIL, whereas Pune was covered by Maharashtra Natural Gas Limited. Also the number of vehicles increase from 252,188 in 2005 to 605,156 in 2009 and CNG stations increased from 249 in 2005 to 377 in 2009. These stations included mother, online, daughter booster and daughter types. Also the price in 2005, which was in the range of Rs. 16.88 / kg and Rs. 22.55 / kg, increase in 2005 in the range of Rs. 18.90 / kg and Rs. 33 / kg in 2009. The average consumption of three old CGD majors viz. IGL, MGL and GGCL was 1252.71 TPD, 770.25 TPD and 179.74 TPD respectively during April 2009. PNG Overview: PNG is mainly methane CH4 with a small percentage of other higher hydrocarbons. The ratio of carbon to hydrogen is least in methane and hence it burns almost completely making it the cleanest fuel. It is procured from the oil / gas wells and transported through a network of pipelines across the country. The supply of PNG is regular and in Delhi it is supplied through Hazira-Bijapur-Jagdishpur (HBJ) pipeline of GAIL. The pipeline network system is an online system, which consists of safety valves and regulators that control and monitor the gas supply and pressure, and assist is supplying system leaks. A domestic PNG connection includes, conversion of one LPG appliance to PNG, laying of associated galvanized iron (GI) pipeline network, along with necessary fittings, 42

Investment Prospects in City Gas Distribution in India

pressure regulator and a meter. The cost of getting PNG connection depends on the type of house and includes installation charges at the time of registration. The minimum amount as fixed charge is paid each month is Rs 100 only for non-usage of gas by consumer after the installation of meter. This fixed charge gets abolished the day the connection is done, thereby the amount to be paid will be based on actual consumption by the consumers, as specified in the meter. The billing is made on meter reading, which is done by IGL staff (Delhi) in every two months. Alternatively a minimum charge of Rs 2500 is placed by the consumer, which gets reduced by bill amount every two months and consumer continues to earn @ 5 % p.a. on reducing balance. Another easier option is to authorize IGL to debit the bill amount directly to your bank account by signing the ECS. The rate of PNG in NCR varies from Rs 16.85 / standard cubic meters (scm) in Delhi to Rs. 18.32 / scm in Ghaziabad. The waiting time for new PNG connection is 6 months after completing pipeline and other infrastructure in NCR while 3-4 months in Mumbai. During the year 2008-09, the number of PNG consumers in Mumbai is 32,000 as compared to 15,000 in Delhi. The growth of PNG consumers in last five years is shown in Table 14 below.
Table 14: Growth in PNG consumers in last 5 years Area 2005 2006 2007 2008 2009

Mumbai 2,22,000 2,55,000 2,95,000 3,48,000 3,80,000 Delhi 28,000 46,000 79,000 1,20,000 1,35,000

Source: Infraline

The cities covered under the Piped Natural Gas (PNG) network in the country are Delhi, Mumbai, Agartala, Surat, Hazira, Junagam, Vasva, Mora, Damka, Bhatlai, Kawas, Rajgiri, Suwali, Icchapore, Ankleshwar, Bharauch, Vadodara, Ahmedabad, Vidyanagar, Anand, Morbi, Gandhinagar, Duliajan, Digboi, Dibrugarh, Moran, Naharkatiya, Sivasagar, Nazira, Simaluguri and Tinsukia. The benefits of both CNG and PNG is as under: (Table15)

43

Investment Prospects in City Gas Distribution in India

Table 15: Benefits of CNG and PNG S. No. 1. a. b. 2. a. Economical CNG PNG Safe and assured supply of gas to domestic, commercial and industrial sectors Cheaper than conventional fuel Pay back period is short Convenient to use Economically more viable compared to other fuels in same sector Technical Very high antiknock power (more than 120 ON) allows greater performance compared to petrol one b. Does not require refining plant or additive adding and can be used immediately after its extraction c. It has no evaporation leaks and spills of fuel, both during refueling and feeding of the car d. Its combustion produces a very low quantity of carbon deposits (permits a longer life of lubricant oil) Source: Infraline No wastage, no under weight cylinders, no hassle for replacement of cylinder, no need for cylinder booking No advance payment for consumption of gas, billing will done in once in two months based on consumption No traffic disruption as supplied through pipelines Continuous supply

Infrastructure of CGD City Gate Station:


Figure 15: A typical City Gate Station

Source: www.best98.com

44

Investment Prospects in City Gas Distribution in India

According to the Petroleum and Natural Gas Regulatory Board (Determination of Network Tariff for City or Local Natural Gas Distribution Networks and Compression Charge for CNG) Regulations, 2008, City Gate Station means the point where custody transfer of natural gas from natural gas pipeline to the city or local natural gas distribution network (hereinafter referred as CGD Network) takes place. The natural gas that is received at the City Gate Stations is mostly passed through a cleaner to remove liquids and dust. The primary function of the city gate station is to measure the amount (volume) of incoming gas. It is generally measured through orifice meters. Another function is to reduce the pressure of the gas to be sent for distribution, as the distribution system requires much lesser pressure than that in long distance transmission. Mechanical devices called pressure regulators lower the gas pressure and helps to control the flow rate to maintain desired pressure level throughout the distribution system. With the reduction in pressure, the natural gas also becomes cooler, so sometimes it has to be heated up in regions where the temperature is below zero degree. Last but not the least, at the City Gate station, the odorization of the natural gas tales place. Different types of odorants are used, so that the smell makes the presence of the escaping, un-burnt gas recognizable at very low concentrations. This serves as a warning well before the gas accumulates to hazardous levels; a mixture of air and natural gas are explosive over the range of 5% to 15% natural gas. To ensure safety, odorized natural gas is detectable at concentration of just 1%. Pressure Pipelines: The piping system also forms a major part in City Gas Distribution. Mainly there are 4 types of piping systems other than supply mains:a) Feeder mains transport gas from the pressure regulator or supply main to the distribution mains. Feeder mains might also have some lines connected to large industrial users. b) Distribution mains supply gas primarily to residential, commercial, and smaller industrial consumers. c) Service lines deliver gas from the distribution main in the street to the consumers meter. Service lines are usually the property and responsibility of the utility. However, some utilities own only the portion of the service lines in the public domain. 45

Investment Prospects in City Gas Distribution in India

d) Fuel lines are customer piping beyond the meter to various appliances. These lines are the property and responsibility of the building owner. CGD network consist of steel pipeline and PE (polyethylene) pipes. City Gas Station are the tap-offs at the main pipeline. These are the termination station for a city where the various processes like pressure reduction, filtration, and odorisation is done. The gas from the main pipeline is brought down to a pressure of 19-22 bars and then transferred through steel pipeline to DRS. District Regulation Station are installed where the distribution is to be done like in the industrial area and domestic/commercial segment. Gas to the various consumers is transferred after being maintained at a pressure of about 4-5 bar. Then the gas is transmitted to Single Stream Regulator (SR) through 4 bar medium pressure PE pipelines. SR further reduces the pressure from 4bar to 100 mbar. From SR the gas is supplied through a 100 mbar low pressure PE pipeline to a G.I. Riser Isolation wall. From this valve the gas is carried through a G.I. (Galvanized Iron) 100 mbar pipelines to end user. The control valve is placed at the height of 5 ft which controls the flow and then a regulator are installed which brings down the pressure to 21 mbar for basic home users. A meter is installed which tells the amount of gas being used depending on which they are charged. Last Mile Connectivity (LMC): It is connectivity between the riser isolation valve before the metering unit and the Suraksha hose pipe connecting the burner in the domestic PNG customers premises. Evolution and Development of City Gas Distribution in India: City gas distribution business dates back to 1857, when Calcutta Gas Company and Bombay Gas Company commenced its operations with coal gas as primary input. Thereafter various Urban Local Bodies (ULBs) came into picture in drawing the chart of gas distribution business. In Vadodara it was Vadodara Municipal Corporation and in Delhi it was Delhi Municipal Corporation which initiated this business during 1972-1980. It was only during late 1980s, when Oil and Natural Gas Corporation (ONGC) and Assam Gas Company was formed, the gas industry emerged. And the momentum of natural gas distribution business was certainly provided by two public sector undertakings viz. 46

Investment Prospects in City Gas Distribution in India

Indraprastha Gas Limited (IGL) in Delhi and Mahanagar Gas Limited (MGL) in Mumbai in late 1980s and mid-1990s (Table 18).
Table 16: Timeline of City Gas Distribution Business in India S. No 1 2 3 4 5 Year 1880 1900 1972 1980 1982-86 City Kolkata Mumbai Vadodara Delhi ONGC Colony at Mehsana & Sibsagar 6 7 8 9 10 11 12 13 1985 1986 1989-91 1994 1995 2004 2005 2006-07 Duliajan Sibsagar Surat, Ankleshwar, Bharuch Mumbai Delhi Vadodara & Ahmedabad Hyderabad Gandhinagar, Kadi, Mehsana, Rajkot, Morbi, Vapi 14 2006 Kanpur, Lucknow CUGL & GGL Assam Gas Company Assam Gas Company Gujarat Gas Company Ltd. Mahanagar Gas Ltd. Indraprastha Gas Ltd. Adani Energy Ltd. Bhagyanagar Gas Ltd. GSPC Gas/Sabarmati Gas Company Calcutta Gas Company Bombay Gas Company Vadodara Municipal Corporation Delhi Municipal Corporation ONGC

As in April 2009 the Authorization Status of Entities is as follows:


Table 17: Authorization Status of Entities

Authorized Entity

Geographical Area Authorized by MoP&NG

Authorization accepted by PNGRB & Grant of 5 years exclusivity period

Indraprashtha Gas Ltd.

Delhi & its suburbs, viz. NOIDA (Gautam Budh Nagar), Gurgaon & Faridabad

01.01.2009

Mahanagar Gas Ltd.

Mumbai, Distt. Thane including Navi Mumbai & Mira Bhayander

21.01.2009

Avantika Gas Ltd.

Indore, Gwalior & Ujjain

30.09.2009 47

Investment Prospects in City Gas Distribution in India

Bhagyanagr Gas Ltd. Maharashtra Natural Gas Ltd. Central UP Gas Ltd. Green Gas Ltd. Tripura Natural Gas Company Ltd. GAIL (1) Ltd. Vadodara

Hyderabad & Vijayawada Pune including Pimpri-Chinchwad area Kanpur & Bareilly Lucknow, Agra Agartala, Tripura

09.10.2009 01.06.2009

22.04.2009 12.11.2009 -

Vadodara

Source: Infraline Table 18: Entities Other Than Gail JVCs in CGD Business

Sate Gujarat Ahmedabad

City

Company Adani & HPCL Gujarat Gas Co. Ltd. GSPC Gas VMSS Sabarmati Gas Great Eastern Energy Corp. Ltd.

Surat, Ankleshwar & Bharuch Hazira, Rajkot, Surendranagar Vadodara Gandhinagar West Bengal Assam Duliajan, Digboi, Dibrugarh, Moran, Naharkatiya, Sivsagar, Nazira, Simaluguri, Tinsukia
Source: Infraline

Asansol

Assam Gas Company Ltd.

India currently has a CGD network in 21 cities with 0.85 million household connected and 0.45 million vehicles on compressed natural gas (CNG). But the total pipeline infrastructure, including 8,000 km of natural gas pipelines and 10,000 km of product pipelines, is inadequate to meet the country's requirements except oil. Recent Developments in Gas Infrastructure and Investments in CGD (April 2009)

Total Gas Consumption : 3.688 MMSCMD Total Investment : Rs 1,673.93 crore 48

Investment Prospects in City Gas Distribution in India

No of CNG vehicles catered: 458804 No of household connected: 511709 Tentative replacement of fuel in quantity as well as in monetary terms:
o o o

Petrol = Rs 2,909 crore Diesel = Rs 2,244 crore LPG = Rs 183 crore


Table 19: Investments made by GAIL/JVCs for CGD Projects (As on April 2009)

Company IGL MGL MNGL CUGL Delhi & Noida

City

Investment Made (Rs. Cr.) 750 695.6 88 115

Mumbai, Thane, Mira Bhayandar, Navi Mumbai Pune Kanpur Bareilly

GGL

Lucknow Agra

104

BGL

Vijayawada Hyderabad

24

TNGCL AGL

Agartala Indore Ujjain

9.9 27

GAIL

Vadodara Agra & Ferozabad Total


Source: Infraline

8.5 144.8 1966.8

49

Investment Prospects in City Gas Distribution in India

Table 20: CGD Likely Roll Out Plan (as in April 2009)

State

No. of Potential Cities

Projected Demand MMSCMD

Projected Investment (in Rs/Cr)

Andhra Pradesh Assam Bihar Punjab & Himachal Pradesh Haryana Gujarat Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra & Goa Orissa Rajasthan Tamil Nadu Uttar Pradesh & Uttarakhand West Bengal Total

37 8 17 13

5.02 5 1.91 3.66

2510 2500 955 1830

17 25 5 26 14 5 12 6 4 28 31

2.61 19.16 0.5 3.89 2.52 0.97 8.08 1.28 1.67 5.95 7.5

1305 9580 250 1945 1260 485 4040 640 835 2975 3750

50 298

4.62 74.34

2310 37170

As in February 2009, the cities for which Expressions of Interests (EOI) have been invited for CGD projects by Petroleum & Natural Gas Regulatory Board are Kota (Rajasthan), Sonipat (Haryana), Mathura (Uttar Pradesh), Kakinada (Andhra Pradesh), Meerut (Uttar Pradesh), Dewas (Madhya Pradesh), Ghaziabad (Uttar Pradesh), Allahabad (Uttar Pradesh), Jhansi (Uttar Pradesh), Rajahmundry (Andhra Pradesh), Yanam (U.T. of Pondicherry), Shahdol (Madhya Pradesh) and Chandigarh (Union Territory). 50

Investment Prospects in City Gas Distribution in India

PNGRB has also formulated a Roll-out Plan for the development of CGD networks in various other geographical areas in the years to come. Years By 2010 By 2013 By 2018 Geographical Areas 85+ 125 250

Ministry of Petroleum & Natural Gas has finalised Vision-2015 of the Oil sector for Consumer Satisfaction and Beyond, wherein efforts would be made to provide CNG/PNG facilities to 200 more cities by the year 2015. As the natural gas is supplied to CNG stations through pipes at high pressure and to PNG consumers without any intermediate handling using equipments of international standards, there is no pilferage of CNG and PNG.
Table 21: Present City Gas Consumption in India (As in April 2009)

Cities

Company

Avg, CNG Gas Sales

Avg. Gas Sales Domestic

Avg. Gas Sales Commercial & Industrial

Total Sales (MMSCMD)

Delhi Mumbai Thane Mira Bhayandar Navi Mumbai Pune Kanpur Bareilly Lucknow Agra Vadodara Vijayawada

IGL MGL

1.692 1.036 0.080 0.033 0.006

0.047 0.165

0.103 0.263

1.842 1.464 0.080 0.033 0.006

MNGL CUGL

0.000 0.054 0.005

0 0

0 0 0

0.000 0.054 0.005 0.054 0.071 0.040 0.009 51

GGL

0.054 0.034

0 0 0 0

0 0.037 0 0

GAIL BGL

0.040 0 009

Investment Prospects in City Gas Distribution in India

Hyderabad Agartala Indore Surat Bharuch & Ankleshwar Ahmedabad Gandhinagar Total AEL SCL TNGCL AGL GGCL

0.005 0 003 0.000 0.15

0 0.013 0 0.090

0 0.009 0 3.850

0.005 0.025 0.000 4.090

0.2 0.04 3.441

0.011 0.002 0.3286

0.190 0.012 4.464

0.401 0.054 8.2336

City Gas Distribution Market in India

City gas distribution certainly is an emerging market in India, which has just took up the pace with recent positive developments like KG-D6 starting production and APM gas price hiked. With the increase in gas supply and development of transmission and distribution network, India foresees vibrant market in near future. The revision in the gas price will bring into level playing field for both private and public sector undertakings, helping in enhanced investment in gas sector both at upstream and downstream level. There has to have a clear co-ordination of government agencies and regulators at these levels as more risk is involved in exploration business.

Profile of Players in City Gas Distribution Key Players Profile in City Gas Distribution Business The snapshot of CGD infrastructure of key city gas distribution companies (Table 22) shows classification of gas consumption in transportation (CNG), domestic household (PNG Connections), industrial and commercial sectors. Each city has a different share of gas distributed among various sector depending on their unique business characteristics. For e.g. in IGL it was under Supreme Court directives, which made CNG available to all public transport, while for MGL it was Mumbai High Court directives. In Mumbai it was domestic sector which had maximum number of connections with a compound annual growth rate of 8.09 per cent till mid 2010. 52

Investment Prospects in City Gas Distribution in India

Table 22: CGD Infrastructure of Key Player in India CGD Infrastructure 2007 2008 2009 2010 3 year CAGR (%) Mahanagar Gas Limited (Mumbai) CNG vehicles Domestic Commercial / Industrial 179720 293302 185918 345793 1000 190296 373210 1032 204832 404000 1100 4.46 8.09 NA

Indraprastha Gas Limited (New Delhi) CNG vehicles Domestic Commercial / Industrial
23

133436 78000 296

227957 121695 304

287851 138000 317

344250 182000 355

22.89 22.29 8.06

Gujarat State Petroleum Corporation CNG vehicles Domestic Commercial Industrial

NA 19000 44000 168711 713 230 480 907 NA NA NA

Gujarat Gas Company Limited (Surat, Bharuch, Ankaleswar) CNG vehicles Domestic & Industrial 63000 230000 86000 252000 109000 280875 119000 296000 17.63 8.38

Adani Gas Limited (Ahmadabad) CNG vehicles Domestic Commercial Industrial 44000 6500 90 255 49000 22000 200 315 56000 45000 400 365 73000 75000 625 445 22.06 84.65 76.78 18.86

Assam Gas Company Limited (Duliajan,

Digboi,

Tinsukia, Dibrugarh, Naharkatia, Moran, Nazira, Sivsagar, etc)

23

Note: GSPC 2010: Updated till August 2010

53

Investment Prospects in City Gas Distribution in India

CNG vehicles Domestic Commercial Industrial 20758 569 332 21782 628 343 NA NA NA

Tripura Natural Gas Company Limited (Agartala) CNG vehicles Domestic Commercial Industrial 335 6646 104 22 853 7213 115 30 1445 7429 133 33 107.69 5.73 13.09 22.47

CGD Infrastructure

2007

2008

2009

2010

3 year CAGR (%)

Charotar Gas Sahakari Mandali Limtied (Anand, Gujarat) CNG vehicles Domestic Commercial Industrial Total Source: Indian Infrastructure Magazine, October 2010 2000 7500 250 70 1328339 2500 9000 300 85 1568581 3000 10600 350 100 1916781 22.47 18.88 18.32 19.52 20.12

Authorized by MoPNG and PNGRB INDRAPRASTHA GAS LIMITED IGL, a joint venture of GAIL, BPCL and Government of Delhi, is the only supplier and distributor of CNG and PNG in Delhi. The project work has been going on 21 new CNG sites, with allotment of 12 more sites is shortly expected. The number of CNG stations in Delhi and NCR is 184 and 12 respectively. Till 2010, GAIL is the sole supplier of gas to IGL. The number of vehicles running on CNG as on August 2010 is as under: Buses 14764 RTV's 5917 Private cars 209813 Autos 54944 Taxies 11560 Other 55849 Total 352847

Key Developments The significant growth in CNG business of IGL is observed during 1999-00 to 2008-09 54

Investment Prospects in City Gas Distribution in India

Parameter

As on

Unit

19992000

20032004 120

20062007 153

20072008 163

20082009 181

No. of CNG Stations

As at year end

Nos.

30

Compression Capacity

As at year end

(Lakh kg/day) (Lakh kg/day)

0.20

16.13

20.18

20.76

26.92

CNG Sale

Daily Average

0.08

7.72

9.42

10.58

12.61

Source: PNGRB

Number of CNG stations served by IGL in Delhi is shown in Table27 Station Mother Online Daughter Daughter Booster Total 72 25 84 181 IGL 53 15 1 3 DTC 24 0 1 0 OMC 0 37 2 45 TOTAL 77 52 4 48

The total number of PNG connections of IGL as on August 2010 is shown as under Area Domestic Delhi Noida Greater Noida Ghaziabad Total 187195 3051 621 1048 191915 Total No. Of PNG Connection Commercial 385 5 0 1 391 Small Industries 15 3 15 2 35 Total 187595 3059 636 1051 192341

55

Investment Prospects in City Gas Distribution in India

Financial Performance: According to the Audited Financial Results ending 31st March 2010, the turnover was Rs. 107,811.85 lakh as compared to Rs. 85,277.07 lakh in 31st March 2009, increasing by 26 per cent. Whereas the net profit increased by 25 per cent from Rs. 17,247.43 lakh in March 2009 to 21,549.65 lakh in March 2010. The share capital of the company is Rs. 14,000 lakh, while reserve and surplus rose from Rs. 54,341.7 lakh in March 2009 to Rs. 68544.9 lakh in 2010. Earning per share too increased from Rs. 12.32 in previous year to Rs. 15.39 in 2010. Future Plans: Year-wise planned committed during 3 years exclusivity period is given in Table 23
Table 23: Year-wise commitment during exclusivity period Delhi Year PNG (Nos.) Additional Commissioned as on date (2008-09) 2009-10 2010-11 2011-12 35,000 35,000 35,000 884 956 1100 30.0 33.5 36.0 1,32,000 Steel Pipeline (Inch Km.) 824 CNG (Lac Kg / Day) Cumulative 23.76

Source: PNGRB IGL plans to invest Rs. 9, 150 lakh during 2010-11 for CNG expansion given the rising demand across Delhi and NCR. For PNG and CNG infrastructure IGL has planned a capital investment of Rs 24,000 lakh for NCR towns, beside covering prospective industrial consumers in these areas. MAHANAGAR GAS LIMITED It was in May 1995, when MGL, a joint venture of GAIL, BG India and Government of Maharashtra, was incorporated in order to set of CGD business. MGL is the 2nd largest CGD company in India, fueling more than 2 lakh CNG vehicles and more than 4 lakh household consumers. GAIL signed a contract with MGL on with the provision that initially the company would draw gas only to cater to domestic, commercial and transport sectors until it achieved sale of 0.778 mmscmd of gas to these sectors, thereafter the

56

Investment Prospects in City Gas Distribution in India

allocation was to be increased to 1.5 mmscmd out of which MGL could sell some gas to industrial consumers24. Key Developments: MGL in February 2009 launched 2nd phase of piped natural gas supply. In the second Phase MGL plans to extend its PNG supply in Peddar Road, Marine Lines, Cuffe Parade, Mantralaya, Colaba areas of South Mumbai and in the third Phase till Navy Nagar. During the second Phase, MGL has laid its steel pipeline network up to Oval Maidan and has already been connected Victoria Memorial School for the Blind and the Taj Mahal Hotel. Mahanagar Gas Limited (MGL) (BG Group 49.75%), the gas distribution business in Mumbai, saw2009 volumes rise 5.8% to 587 mmcm25. To support this volume growth,MGL has signed long-termgas supply agreements for additional gas fromthe RIL D-6 and ONGC C Series fields and framework agreements to source spot LNG26. The number of vehicles served as on April 2010 by MGL in Mumbai and suburbs are 2, 01,060 through 144 stations. The breakup of total PNG connection is as under: Total No. of PNG Connection Domestic Commercial Small Industries
4,42,417 1017 27

Total
4,43,461

Due to excess installed compression capacity, MGL is almost double the CNG demand in Mumbai and its suburbs, making it strategically placed better. This excess capacity can be utilized by state transports authorities to open CNG outlets in their depot premises to cater the needs of transport buses. Financial Performance: BG has 49.8 per cent stake in MGL. Future Plans Year-wise planned committed during 3 years exclusivity period is given in Table 24

24 25

Natural Gas in India 2006, A Reference Book, GAIL-Infraline Annual Report of BG 2009 26 Ibid

57

Investment Prospects in City Gas Distribution in India

Table 24: Year-wise commitment during exclusivity period Mumbai & Greater Mumbai Year PNG (Nos.) Cumulative Commissioned as on date (2008-09) 2009-10 2010-11 2011-12 3,50,000 3,78,000 4,06,000 3,22,000 As MGL has already reached all charged areas of steel pipeline of sufficient capacity (1580 Inch-KM) in GA-1. No specific target has been fixed for this milestone. However MGL would commensurate with emerging demand in GA-1 1591 1693 1795 Steel Pipeline (Inch Km.) CNG (000 Kg / Day) Cumulative 1476

Source: PNGRB Investment Requirements: MGL has already invested over Rs.100 crores in development of pipeline network in South Mumbai area and by next year another Rs.50 crores would be invested to create the requisite infrastructure. MGL plans to augment its City Gas Distribution infrastructure with an investment of Rs.1500 crore in the next five years. With this investment, we will reach 10 lakh customers from four lakhs now27.

CENTRAL U.P. GAS LIMITED Central UP Gas Limited incorporated on 25.02.2005, is a JV of Bharat Petroleum Corporation Limited, holding 22.5 per cent of equity share. The remaining share is with GAIL with 22.5 per cent, State Government with 5 per cent and 50 per cent with foreign institutional investors and public. Key Developments: GAIL had signed JVA with BPCL on 26th July 2004 for formation of Joint Venture Company to implement City Gas Distribution in the city of Kanpur, Uttar Pradesh. Land for first CNG station acquired at Fazalganj. Subsequently, lands have been acquired for two more Mother / Online Stations at Makarikhera & Juhi. RoU / permission for laying pipelines were taken from State Authorities. Feeder pipeline upto City Gate Station at Fazalganj has already been laid and commissioned.
27

http://www.hindu.com/thehindu/holnus/006200902151711.htm 58

Investment Prospects in City Gas Distribution in India

Approx. 25 KM Steel Pipeline laid within city as part of City Gas Distribution Project. Financial Performance: GAIL has signed Gas Supply Agreement with M/s CUGL for supply of 0.1 MMSCMD gas for Kanpur City Gas Distribution project. Future Plans Year-wise planned committed during 3 years exclusivity period is given in Table 25
Table 25: Year-wise commitment during exclusivity period Kanpur & Bareilly Year PNG (Nos.) Additional Steel Pipeline (Inch Km.) Commissioned as on date (2008-09) 2009-10 Kanpur 35 Bareilly Nil Kanpur 5000 Bareilly 3000 2010-11 Kanpur 10000 Bareilly 4500 2011-12 Kanpur 15000 Bareilly 6000 2012-13 Kanpur 20000 Bareilly 7000 2013-14 Kanpur 20000 Bareilly - 7000 Kanpur 219.62 Bareilly Nil Kanpur 96.90 Bareilly 120.00 Kanpur 101.20 Bareilly 48.00 Kanpur 108.00 Bareilly 48.00 Kanpur 112.80 Bareilly 60.00 Kanpur 150.00 Bareilly 80.00 CNG (Lac Kg / Day) Additional Kanpur 80000 Bareilly 16000 Kanpur 64000 Bareilly 16000 Kanpur 48000 Bareilly 24000 Kanpur 48000 Bareilly 24000 Kanpur 48000 Bareilly 16000 Kanpur 32000 Bareilly - 16000

Source PNGRB Demand Projections for Bareilly:


Consumers Distribution Projected 1000 30 2 450 Planned 1000 30 2 450 Projected Demand (MMSCMD) 0.004 0.002 0.008 0.002 0.016 Consumers Distribution Projected 81000 144 72 7800 Planned 81000 144 72 7800 Projected Demand (MMSCMD) 0.083 0.020 0.042 0.036 0.181

Sector

Domestic Commercial Industrial CNG Total

59

Investment Prospects in City Gas Distribution in India

With Gas Allocation of 0.05 mmscmd, the feeder pipeline is being laid by GAIL Augmentation Plan (as per DFR) is one Mother and Daughter Station each in Bareilly. In case of Kanpur with gas allocation of 0.1 mmscmd following demand projection is done.
Phase-I (3rd year) (mmscmd) Sector Projected Demand Distribution Planned Phase-II (10th Year) (mmscmd) Projected Demand Distribution Planned

Consumers Demand Consumers Demand Consumers Demand Consumers Demand Domestic Commercial CNG Ind. Total 130900 421 148 22000 0.0746 0.0046 0.1960 0.1075 0.3827 1000 20 8 220000 0.0006 0.003 0.0337 0.1075 0.1448 375000 421 148 28000 0.2142 0.0056 0.2763 0.1391 0.6352 300000 421 148 28000 0.1713 0.0056 0.2763 0.1391 0.5923

The augmentation plans for Kanpur is as under:


Daughter Booster Station 4 2 6 11 5 16 Total

Year

Mother Station 4 1 5

On Line Station 3 2 5

Phase I Phase II Total

Investment Requirements: Rs 32 crores of investment has already been made aligning with the plans and projections set for Kanpur. BHAGYANAGAR GAS LIMITED Bhagyanagar Gas, a joint venture of two GAIL (India) Ltd and Hindustan Petroleum Corporation Ltd. (HPCL) emerged as the winner for Kakinada (Andhra Pradesh) in the first round of bidding in October 2008. Key Developments: BGL, which has been in existence for almost 7 years in AP, has launched CNG in the cities of Vijayawada (in August 2005) and Hyderabad (in August 2006). Five CNG stations, including a mother station, are under operation in Vijayawada, while three stations are 60

Investment Prospects in City Gas Distribution in India

present in Hyderabad. In addition to CNG, BGL is also marketing Auto LPG through 4 outlets (one in Tirupati and three in Hyderabad). The natural gas to Vijayawada mother station is being supplied by GAIL from the KG basin production, utilising the existing gas pipeline transportation network between Tatipaka to Kondapalli (Vijayawada). GAIL has constructed an exclusive spur line from Kondapalli to BGL's mother station in Vijayawada of approximately 9 km length. Presently there is no gas pipeline from KG basin to Hyderabad. However CNG has been launched in Hyderabad by BGL by feeding CNG from its mother station at Vijayawada through mobile cascades. GAIL and Hindustan Petroleum joint venture Bhagyanagar Gas is looking forward to sign an agreement for 100,000 cm/d D6 gas supplies from Reliance. This would be in in addition to the 75,000 cm/d supplies it has already secured from GAIL for its city gas operations at Kakinada, Hyderabad and Vijayawada in Andhra Pradesh. On February 10, 2010, the company also invited price bids to buy dispensers for five new daughter CNG stations. Bhagyanagar has already constructed a mother CNG station at Kakinada, which is expected to be inaugurated very soon. Future Plans Year-wise planned committed during five years exclusivity period is given in Table 26
Table 26: Year-wise commitment during exclusivity period Hyderabad & Vijayawada Year PNG (Nos.) - Additional Steel Pipeline (Inch Km.) CNG (Kg / Day) Additional Commissioned as on date (2008-09) 2009-10 Hyderabad Nil Vijayawada 500 Hyderabad 1000 Vijayawada 500 2010-11 Hyderabad 31000 Vijayawada 19500 2011-12 Hyderabad 101000 Vijayawada - 24900 2012-13 Hyderabad 176000 Vijayawada 25500 2013-14 Hyderabad 266000 Vijayawada - 26867 Hyderabad Nil Vijayawada Nil Hyderabad 90 Vijayawada - 18 Hyderabad 2350 Vijayawada 377 Hyderabad 1602 Vijayawada 240 Hyderabad Nil Vijayawada Nil Hyderabad Nil Vijayawada Nil Hyderabad Nil Vijayawada 47000 Hyderabad 35410 Vijayawada 36000 Hyderabad 212459 Vijayawada 54000 Hyderabad 495738 Vijayawada - 54000 Hyderabad 708197 Vijayawada 36000 Hyderabad 849836 Vijayawada - 0

Source: PNGRB 61

Investment Prospects in City Gas Distribution in India

With the new gas discoveries in the KG basin, the availability of gas had doubled in the country and Vijayawada had the advantage of receiving CNG at a cheaper price because of its nearness to the gas fields. Gas would be available at a cheaper rate in AP because of the lower cost of transportation in view of the location of gas fields here itself. Now it would all depend on creating demand and infrastructure to use as much gas as possible in the state. BGL was under an obligation to give 97,000 piped gas domestic connections in the Vijayawada Municipal Corporation limits by 2014. It was now for the people to demand and put pressure on the BGL to lay the necessary network fast and deliver service Investment Requirements: BGL will have to develop infrastructure worth Rs 500 crore in Vijayawada in the next five years for supply of CNG and piped natural gas (PNG) for domestic users and other products. AVANTIKA GAS LIMITED Avantika Gas Limited, a JV of GAIL and HPCL, was set up for executing city gas distribution networks in the cities of Indore, Gwalior and Ujjain in Madhya Pradesh. Key Developments: Infrastructure of Avantika till date is 1 CNG Station each of mother and daughter, a steel pipeline of 1 km, number of vehicles converted till date is 475 and the first CNG sales happens to be from September 2008, which has now reached to 154865.80 kg as on January 31, 2009. Land has been identified and applied for setting up of yet another mother station at Indore. The first CNG mother station in Gwalior is going to get ready by August 2011. Besides mother station, it has also planned to set up three daughter CNG stations in Gwalior and expects to sell up to 0.033 MMSCMD of gas in the first year of operations to 20,000 cars and 6,000 auto rickshaws. The gas supply source would be from nearby GAILs 87 km long pipeline from Kailaras town to Malanpur city. Avantika is also planning to have 10 more CNG stations in Indore which is expected to be ready by March 2011. But Ujjain and Gwalior is not as progressive as Indore in terms of CNG infrastructure which AGL should take care. Future Plans Year-wise planned committed during five years exclusivity period is given in Table 27

62

Investment Prospects in City Gas Distribution in India

Table 27: Year-wise commitment during exclusivity period Indore & Ujjain City Year PNG (Nos.) - Additional Steel Pipeline (Inch Km.) Commissioned as on date (2008-09) 2009-10 2010-11 2011-12 2012-13 2013-14 Nil 500 7500 17500 32000 50000 10 100 136 120 132 42 CNG (Kg / Day) Additional 21648 64944 151566 162363 227307 259782

Source: PNGRB Investment Requirements: Funds will be raised though equity and debt in next financial year. The future expansion plan for next one year will cost Rs.82.70 cores. GREEN GAS LIMITED Green Gas is authorized to implement city gas distribution in Agra, Lucknow and cities of Western UP. Key Developments: As in July 2009, GAILs JVC M/s. Green Gas Ltd. is operating in Agra city by supplying CNG. GGL has set up 3 CNG stations in Agra and is catering to nearly 6,195 vehicles by selling 0.03 MMSCMD of gas. The cumulative gas sales in Agra stood as under:

Details

Total CNG Stations

Sales up to 31.01.2009 (in MT) 16423

CNG vehicles converted up to 31.01.2009 6195

Agra

63

Investment Prospects in City Gas Distribution in India

The status of City Gas Distribution in Agra was as follows;


Area Agra Facility CNG Station Classification Mother Station Online Station Daughter Booster Station No. of Vehicles Steel Network Length MDPE Network Length Domestic Connection Commercial Connection Industrial Connection 17 km 39 km 1000 20 Nil Planned 2 3 5 Actual 1 Nil 2 6195 7.0 km Nil Nil Nil Nil

Future Plans: Year-wise commitment during 5 years exclusivity period is given in Table 28
Table 28: IGLs Year-wise commitment during exclusivity period Agra Year PNG (Nos.) Cumulative Commissioned as on date (2008-09) 2009-10 2010-11 2011-12 2012-13 2013-14 Nil 2000 6000 10000 16000 22000 Steel Pipeline (Inch Km.) 56 84 198 312 388 388 CNG (Kg / Day) Cumulative 36000 72000 90000 108000 108000 108000

Source: PNGRB Green Gas has asked the oil ministry for 110,700 SCMD of subsidised gas for Lucknow, where it is gearing up to commence its first piped gas supplies in August 2010. Green Gas presently has a subsided gas allocation of 0.1 MMSCMD for Lucknow, which can only be sold as CNG to vehicles or as piped gas to households. The company expects to sell its total allocation by December, 2010 owing to its rapidly growing CNG and PNG customer base in Lucknow. In the month of January 2010, green gas pushed its piped gas plan in Lucknow and Agra till March 2010. 64

Investment Prospects in City Gas Distribution in India

Investment Requirements: It has made a total investment of Rs 26.15 crores in Agra. DSM INFRATECH Saumya DSM Infratech, incorporated in 2008, is progressing with its project plans of setting up a gas network at Mathura in Uttar Pradesh, for which it won a license in May 2009. The oil ministry allocated 20,000 cm/d gas to Saumya in December 2009, which seems to be enough for the company for the first year of operations. Key Developments: Saumya also signed a MoU with Shell late in 2009 to source R-LNG from the Hazira LNG terminal. Gas allocated by the government can be sold only as CNG. Mathura has emerged as a ready market for Saumya as the city is severely affected with electricity shortages. The company claims factories, hotels and restaurants are lining up and are ready to pay any price for gas to fuel their power generators. By April 2010, the company had two CNG stations ready to start selling CNG. Future Plans: Year-wise commitment during 5 years exclusivity period is given in Table 29
Table 29: Year-wise commitment during exclusivity period Mathura Year PNG Domestic Connections (nos.) 1st Year 2 Year 3rd Year 4th Year 5 Year
th nd

City Gate Stations

CNG Online Stations (nos.)

Steel Grid (Inch Km.)

10000 18000 17000 12000 8000

0 1 0 0 0

0 2 0 2 1

160 150 30 50 2

Source: PNGRB Authorizations issued by Government to entities and cities for CGD Entities authorized by MoPNG for City Gas Distribution S. No 1.

JVC Mahanagar Gas Limited

AREA OF OPERATIONS Mumbai and district Thane including Navi Mumbai and 65

Investment Prospects in City Gas Distribution in India

Mira- Bhayender. 2. 3. 4. Indraprastha Gas Limited Bhagyanagar Gas Limited Tripura Natural Gas Company Limited Maharashtra Natural Gas Limited Aavantika Gas Limited Sabarmati Gas Ltd. Green Gas Limited Gujarat Gas Company Limited Delhi and its suburbs, viz., NOIDA (Gautam-budh Nagar), Gurgaon and Faridabad Vijaywada and Hyderabad Agartala

5. 6. 7. 8. 9.

Pune including Pimpri & Chinchward Indore, Ujjain and Gwalior Gandhinagar, Mehsana and Sabharkantha Lucknow. Agra Surat, Bharuch and Ankleshwar Kanpur and Bareilly Vadodara

10. Central U P Gas Limited 11. GAIL (India) Ltd.

Other entities supplying CGD to the cities:S. No. 1 2 3

JVC Adani Energy Limited. HPCL Vadodara Mahanagar Seva Sadan

AREA-OF OPERATIONS Ahmedabad Ahmedabad Vadodara

66

Investment Prospects in City Gas Distribution in India

4 5

GSPC Assam Gas Company Limited

Rajkot, Murbi, etc. Duliajan, Digboy, Tinsukia, Dibrugarh, Naharkatia, Moran, Nazira, Sivasagar etc.

In first two rounds of bidding First Round of Bidding for CGD Network Projects (As on 23.10.08) Petroleum & Natural Gas Regulatory Board (PNGRB), Indias downstream and gas regulator, issued bid document for the first round of bidding for City Gas Distribution (CGD) network projects on October 23, 2008. The cities that were put to bid include Kota (Rajasthan), Sonepat (Haryana), Mathura (Uttar Pradesh), Kakinada (Andhra Pradesh), Meerut (Uttar Pradesh) and Dewas (Madhya Pradesh). The results of the first round of bidding were declared in April 2009, in which GAIL subsidiary GAIL Gas emerged as the winner of four out of six cities namely Meerut, Kota, Sonepat and Dewas, and was also the sole bidder in a fifth city, Mathura. But DSM Infratech bid and won this town, defeating GAIL Gas' low network tariff, after the gas regulatory board extended the deadline for Mathura by one month. Bhagyanagar Gas won Kakinada, defeating Reliance, the natural choice for this city as landfall point for D6 gas. Other companies that participated in the first round of bids, include Gujarat State Petroleum Corporation (GSPC) Gas Company, Reliance Gas, Bharat Petroleum Corporation (BPCL) and Indraprastha Gas Ltd (IGL). Indian Oil Corporation formed a joint venture with Adani Energy to bid for CGD network.

67

Investment Prospects in City Gas Distribution in India

Table 30: Snapshot of Winners in Round One CGD Bidding City States Bidders Winners Populati on (Census2001) No, of Househo ld in CGD Total Municip al Area 175 km2 No. of Vehicles (2007-08) Primary Potential of Gas Demand Trunk Pipelin e Connec tivity Kakinad a Andhra Pradesh Reliance Gas Corporatio n, Bhagyanag ar Gas Limited Bhagyanag ar Gas 0.35 lakh 90000 Bus - 6235 Three Wheelers 8921 Four Wheelers 8263 Domestic: 0.012 mmscmd Commerc ial: 0.006 mmscmd Industrial: 0.1 mmscmd CNG: 0.017 mmscmd Dewas Madhy a Pradesh Gail Gas Limited , IOC-Adani Energy, Gujarat State Petroleum Corporatio n Gail Gas 2.31 lakh 38500** 46 km2 Bus - 210 Auto - 120 Four Wheelers 6000 Domestic: 17046 scmd Commerc ial: 2520 scmd Industrial: 516500 scmd Automobi le: 10650 scmd JagotiPitampu r Likely Tap-off point will be at JagotiPitampu r pipeline of GAIL

68

Investment Prospects in City Gas Distribution in India

Meerut

Uttar Pradesh

Gail Gas Limited , IOC-Adani Energy,

Gail Gas

11.6 lakh

180000

499 km2

Bus - 3150 Three Wheelers 2856 Four

Domestic: 0.05 mmscmd Commerc ial: 0.02 mmscmd Industrial: 0.36 mmscmd CNG: 0.07 mmscmd

East West Pipeline

Indraprast ha Gas Limited

Wheelers 27465

Sonepat

Haryan a

Gail Gas Limited, IOC-Adani Energy, CairnBPCL, DCM Infrastruct ure

Gail Gas

2.25 lakh

37512**

30 km2

3-Wheelers (Petrol) 2833 3-Wheelers (Diesel) - 813 Car (Petrol) 6080 Car (Petrol) 1520 Taxis (Petrol) - 112 Taxis (Diesel) - 169 City Bus 225 School Busses - 300

Domestic: 1234 scmd Commerc ial: 631 scmd Industrial: 59945 scmd Automobi le: 2741 scmd

Tap-off cum Dispatc h Termin al at SV-8 to Bahalga rh Chowk along NH-1

Kota

Rajasth an

Gail Gas Limited, CairnBPCL,

Gail Gas

6.94 lakh

130000

56 km2

Bus - 250 Auto - 7002 Car - 19947 Jeep - 7122

Domestic: 26749 scmd Commerc

HVJ

69

Investment Prospects in City Gas Distribution in India

IOC-Adani Energy

ial: 378 scmd Industrial: 72100 scmd Automobi le: 24267 scmd
2

Mathura

Uttar Pradesh

Gail Gas Limited, DSM Infratech

DSM Infratech*

3.23 lakh

51845**

40 km

Auto - 2113 Pvt. Vehicle 3 W - 394 Pvt. Vehicle 3 W (Cars) 394 Taxi Cab 158 Bus Passenger Stage Carrier - 26 Private Bus 36 Heavy Vehicles Trucks & Lorries - 928 Tempos (LCV) - 894 Maxi - Cab 40

Domestic: 19429 scmd Commerc ial: 930 scmd Industrial: 22159 scmd Automobi le: 26286 scmd

Likely Tap-off point will be at GREP trunk pipeline at Lalpur village (SV-9) on the Saunkh Road

Notes * Though Gail Gas Limited was the sole bidder for Mathura, but DSM Infratech bid and

won this town, defeating Gail Gas low network tariff after PNGRB extended the deadline for Mathura by one month ** Assuming average proposed household size of 6 70

Investment Prospects in City Gas Distribution in India

***

Standard Cubic Metres Per Day

**** RGCL - Reliance Gas Corporation Limited is now Reliance Gas Transmission and Infrastructure Limited

Second Round of Bidding for CGD Network (As on 25.02.09) As a part of the on-going exercise of bidding rounds for new CGD networks across India, the Petroleum & Natural Gas Regulatory Board (PNGRB) had initiated second round of bidding in February 2009 for which the last date of submission was 25th June, 2009. A total 7 Geographical Areas (GA) - Allahabad (Uttar Pradesh), Chandigarh (Union Territory), Ghaziabad (Uttar Pradesh), Jhansi (Uttar Pradesh), Rajahmundry (Andhra Pradesh), Shahdol (Madhya Pradesh) and Yanam (UT of Puducherry) - were put-up for bidding. A total of 18 bids were received within the due date from 8 entities i.e. IOC and Adani Energy Ltd., HPCL, GAIL Gas Ltd., RGCL, IGL, Siti Energy Ltd., GSPL and Bhagyanagar Gas Ltd. The details of GA wise details of bids received within the scheduled time are as under:
Table 31: Winners of Round 2 Bidding4 City States Bidders Winners Population (Census2001) No, of Household in CGD Total Municipal Area No. of Vehicles (2007-08) Primary Potential of Gas Demand Trunk Pipeline Connect ivity

Allahabad

Uttar Pradesh

IOC-Adani Energy, Gail Gas Limited

IOCAdani Energy

10.50 lakh

1.60 lakh

429 km2

Bus - 5815 3-Wheelers - 35768 4-Wheelers - 59550

Domestic: 0.06 mmsmd Commerci al: 0.02 mmscmd Industrial: 0.10 mmscmd CNG: 0.07

RGTIL

71

Investment Prospects in City Gas Distribution in India

mmscmd

Chandigarh

Punjab

IOC-Adani Energy, Gail Gas Limited, HPCL & GSPL

IOCAdani Energy

303 km2

Bus - 2250 3-Wheelers - 13495 4-Wheelers - 17892

Domestic: 0.08 mmsmd Commerci al: 0.02 mmscmd Industrial: 0.10 mmscmd CNG: 0.09 mmscmd

RGTIL

Ghaziabad

Uttar Pradesh

IOC-Adani Energy, Gail Gas Limited, Indraprasth a Gas Limited, Siti Energy Ltd, GSPL

Indraprast ha Gas Limited

9.68 lakh

1.80 lakh

217 km2

Bus - 7228 3-Wheelers - 11165 4-Wheelers - 50479

Domestic: 0.05 mmsmd Commerci al: 0.02 mmscmd Industrial: 0.36 mmscmd CNG: 0.07 mmscmd

RGTIL

72

Investment Prospects in City Gas Distribution in India

Jhansi

Uttar Pradesh

Gail Gas

Not Applicabl e
1

4.6 lakh

75650

30 km2

Auto 3272 Pvt. Vehicle 3 W - 1103 Pvt. Vehicle 3 W (Cars) 11115 Taxi Cab 178 Bus Passenger Stage Carrier 103 BusPassengercontract Carrier 143 School Bus - 14 Private Bus - 45 Police Vans - 19 Heavy Vehicles Trucks & Lorries 1896 Tempos (LCV) 2134 Tempos - 3

Domestic: 20758 scmd Commerci al: 911 scmd Automobi le: 23550 scmd (2008-09)

Tap-off point will be at HVJ pipeline

73

Investment Prospects in City Gas Distribution in India

Wheelers (6+1 Seater) - 26 Ambulance s - 28

Rajahmundr y

Andhra Pradesh

IOC-Adani Energy, Reliance Gas Ltd, Bhagyanag ar Gas Limited

RIL

3.15 lakh

63000

47 km2

Bus - 250 3-Wheelers - 6900 4-Wheelers - 9744

Domestic: 0.0164 mmscmd Commerci al: 0.0073 mmscmd Industrial: 0.2250 mmscmd CNG: 0.0176 mmscmd

RGTIL

Shahdol

Andhra Pradesh

Reliance Gas Limited

Not Applicabl e
2

0.8 lakh

15000

52 km2

Bus - 427 3-Wheelers - 535 4-Wheelers - 1774

Domestic: 0.01 mmscmd Commerci al: 0.01 mmscmd Industrial: 0.15 mmscmd CNG: 0.03 mmscmd

RGTIL

74

Investment Prospects in City Gas Distribution in India

Yanam

Andhra Pradesh

Reliance Gas Limited

Not Applicabl e
3

0.32 lakh

6400

7 km2

Bus - 15 3-Wheelers - 50 4-Wheelers - 100

Domestic: 0.016 mmscmd Commerci al: 0.010 mmscmd Industrial: 0.31 mmscmd CNG: 0.0050 mmscmd

RGTIL

Note: 1. Since only one bid received in respect of GA of Jhansi, the Board extended the date of bid submission for one month till July 24, 2009 2. Since only one bid received in respect of GA of Shahdol, the Board extended the date of bid submission for one month till July 24, 2009 3. Since only one bid received in respect of GA of Yanam, the Board extended the date of bid submission for one month till July 24, 2009 4. The second auction was not completed as IGL challenged PNGRBs authority to issue CGD licences.

75

Investment Prospects in City Gas Distribution in India

Since only single bids have been received in respect of GAs of Jhansi, Shahdol and Yanam, the Board has extended the last date of bid submission for these GAs by one month in line with the Regulation 5(9) of the Petroleum and Natural Gas Regulatory Board (Authorising Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Regulations, 2008. Accordingly, the last date for sale of bid document for these three GAs has also been extended up to 17th July 2009. All the interested parties may submit bids for development of CGD network in the geographical area of Yanam, Shahdol, and Jhansi by 24th July, 2009. PNGRB is simultaneously proceeding for inviting bids in 3rd round of bidding for the next batch of cities.

Bidding Strategies of Players All the bidders were required to bid as per the key regulatory framework of PNGRB, but still most of them had confusions and queries regarding the procedure of their bidding. Since the strategies of the bidding which they implemented in winning the bid is not something which is in public domain. But they strictly had to follow the regulations. Code of Practice for Quality of Service for City or Local Natural Gas Distribution Networks Technical Standards and Specifications including Safety Standards for City or Local Natural Gas Distribution Networks Exclusivity for City or Local Natural Gas Distribution Networks Determination of Network Tariff for City or Local Natural Gas Distribution Networks and Compression Charge for CNG Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks The issues which the bidders raised before their bidding exercise were broadly related to connectivity issue, bidding issues and regulations. For e.g. in case of connectivity issue one of the prospective bidder asked In case there is a delay in providing the connectivity by the Transmission operating company to a CGD operator, will the exclusivity period be extended? For many cities, the pipeline networks for transmission of gas is yet to be developed. Since the exclusivity period starts from the day of

76

Investment Prospects in City Gas Distribution in India

authorization, there shall be a mismatch between CGD development and pipeline network.CGD operator shouldn't be penalized in this situation28. All the queries raised by them were accordingly answered giving reference to the appropriate regulatory aspects. Trends and Future Demand Estimates of CGD
CGD Likely Roll Out Plan (as in April 2009) State No. of Potential Cities Projected Demand MMSCMD Andhra Pradesh Assam Bihar Punjab & Himachal Pradesh Haryana Gujarat Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra & Goa Orissa Rajasthan Tamil Nadu Uttar Pradesh & Uttarakhand West Bengal Total 50 298 4.62 74.34 2310 37170 17 25 5 26 14 5 12 6 4 28 31 2.61 19.16 0.5 3.89 2.52 0.97 8.08 1.28 1.67 5.95 7.5 1305 9580 250 1945 1260 485 4040 640 835 2975 3750 37 8 17 13 5.02 5 1.91 3.66 2510 2500 955 1830 Projected Investment (in Rs/Cr)

PNGRB has also formulated a Roll-out Plan for the development of CGD networks in various other geographical areas in the years to come.

28

PNGRB website

77

Investment Prospects in City Gas Distribution in India

Years By 2010 By 2013 By 2018

Geographical Areas 85+ 125 250

Assessment of by government (11th 5 Year Plan) The demand for CGD has moved proportionately to the gas demand. From just 2 cities at the beginning of X Five Year Plan to .. Use of natural gas in the domestic sector, especially in the urban areas, would gain further importance during the XI Plan period due to the flexibility and the advantage of natural gas over competing fuels. Safety of such distribution systems would need to beemphasized. Besides adhering to the international codes and practices for the design and operation of such systems (such as ASME/ANSI B31.8), it would be desirable to develop indigenous safety codes for city gas distribution and follow the same. This is another sector which has a high growth potential. World-wide, city gas distribution has grown hand in hand with the gas sector development in terms of supply infrastructure and transmission infrastructure. With the expected growth in the gas supply and the simultaneous creation of gas inter-state transmission infrastructure in India, this sector is bound to grow in the XI Plan period. With the emphasis on clean environment, this sector would get the necessary thrust in the coming years. In line with this, various players, primarily led by GAIL, have drawn up ambitious plans to roll out city gas infrastructure across a number of cities in the country. From the existing coverage of 10 cities, the coverage is expected to grow to 40 cities in the next 5-7 years. This sector can be expected to grow at double digit rates in the later part of the XI Plan period. The current demand estimates in this sector is about 11 MMSCMD in 2006-07 and 12.08 MMSCMD in 2007-08. Assuming a conservative annual growth of 8 percent, the demand would go up to about 12.93 MMSCMD, 13.83 MMSCMD, 14.8 MMSCMD and 15.83 MMSCMD in 2008-09, 09-10, 10-11 and 2011-12 respectively.

78

Investment Prospects in City Gas Distribution in India

The overall sector-wise natural gas demand is shown in table below:


Table 32: Sector Wise Gas Demand Projections (2007-012)

Source: Report of the Working Group on Petroleum and Natural Gas for XI Plan Period (2007-2012)

The IEP has projected gas demand of 682 MMSCMD by 2031-32 in an 8 percent growth scenario with the assumption that power sector would have 20 percent power generation based on gas (from current 12 percent level), 100 percent urea production based on gas and 7 percent growth of other sectors. But the policy also qualifies the projection by saying that relative prices of fuels would decide the growth trend. Indian gas market is still in a stage of transition. The Working Group has assumed that the gas sector would move towards a market determined pricing mechanism during the XI plan period. At this point in time when gas is still under controlled prices for power and fertilizer sector and is expected to move through a period of transition, it would not be reasonable to assume a growth trend and project gas demand beyond 2011-12. So after careful consideration, the projections for gas demand have not been made for 2012-17 and 2017-22. As the market attains a certain degree of maturity with transition towards market determined prices and competing alternate fuels lead to a more realistic market price, which is expected to take place during the XI plan, a detailed study could be carried out to project demand for the longer term. Demand side issues in CGD Business Issues and concerns related to demand side management 79

Investment Prospects in City Gas Distribution in India

The demand of natural gas is the most in power and fertilizer sector, and CGD cannot compete with them at current scenario given that with respect to domestic consumption of energy is most a biomass and only with rapid urbanization these regions will develop in order to have some demand in CGD. But the first thing to be done here is the mass awareness among people residing in villages to opt for piped natural gas options rather going for typical LPG connections. And if the volume of the business has to be raised then the capital cost of installation will surely come down leading to economies of scale. Therefore in order to promote gas among those who have not even seen an LPG cylinder will be a step towards right direction. The condition of infrastructure connectivity will be the same as in case of an urban area and surely the availability of gas. But here postal tariff needs to be followed because the end consumers will not be in a position to bear the cost. And if the subsidy can be provided to LPG, which further gets diverted and black marketed then why not for natural gas, which is anytime better than LPG. As far as creating a demand for vehicle running on CNG, the process will move as it is moving. The maximum number transport depots should be connected with CNG stations starting with the main source of supply moving from larger cities to smaller and then to towns and villages. India regarded to be having fifth largest natural gas vehicles to the tune of around 7,00,000 in nos. after Pakistan, Argentina, Brazil and Iran. This is the case in Indias still evolving natural gas market which after getting mature will surely lead the world sooner than later. Creation of demand should go parallel with more and more investments in exploration and production of natural gas as one cannot always depend on LNG since India hardly has a long terms contract in LNG trade. Most of the transactions happens to be on spot basis. Despite the rise in the price in APM in order to attract investment in upstream and specially the public sector companies, the natural gas price will still remain below the price paid for LNG purchase. Sources of Supply and Future Supply Outlook for CGD Supply of Gas to CGD Projects Gas Supply to CGD Projects (As in April 2009) Cities Estd. Addl. Demand (MMSCMD) IGL Delhi, Noida, Gurgaon, Faridabad & 2009 0.20 Best Endeavour Basis-2009 0.20 80

CGD Projects

Investment Prospects in City Gas Distribution in India

Greater Noida MGL Mumbai, Navi Mumbai, Thane, Mira Bhayander CUGL GGL MNGL BGL AGL TNGCL GAIL GAIL Gas Ltd.- New Proj. Total Excludes CGD project other than GAIL GAIL/JVCs of GAIL are augmenting the CNG infrastructure and number of CNG stations in the respective cities to meet the increased requirement of conversion of vehicles to CNG. Further, the Ministry of Petroleum & Natural Gas (MoPNG) has formulated the gas utilization policy for utilization of natural gas produced from NELP blocks and has allocated 5 MMSCMD of natural gas to the city gas projects from 40 MMSCMD natural gas expected to be available from Reliance KG Basin fields in the first quarter of 2009. Supply side issues in CGD On supply aspect of natural gas till 2010, the prices of APM was kept quite low resulting into investors staying away from this business, as the same was not viable to them. Many companies specially upstream companies suffered a huge loss (Table). But the time when price raised to $4.2 / mmbtu the investment climate seemed to be more positive.
Current Gas Price
APM
1

160

1.60

Kanpur & Bareilly Lucknow & Agra Pune, Pimpri, Chinchwad Hyderabad & Vijayawada Indore, Gwalior & Ujjain Agartala Vadodara Various Cities

0.50 0.40 0.40 0.20 0.66 0.03 0.04

0.50 0.40 0.40 0.20 0.66 0.03 0.04

4.03

4.03

Customers outside North-East 2.29

US $ /mmbtu 3.82

Rs. /mscm 6818

Customers in North-

4091

81

Investment Prospects in City Gas Distribution in India

East Non-APM LNG

Pre-NELP NELP

Long term agreement 4 Spot cargo

5.24 4.20 6.53 5.40-6.15

9354 7500 11660 9642 - 10982

SI. No. 1. 2. 3. 4. 5. 6. 7. 8. 9.

Table 33: The total cost of gas sold suffered by ONGC on supplying APM gas (2006-09) Particulars Unit 2006-07 2007-08 2008-09 Total Cost (ONGC excl TVs) As per CARR* ROCE** as per TC*** recommendation Total Cost incl. ROCE (1+2) Sales Realisationf Loss (4-1) Under-recoveries (4-3) Quantity sold (ONGC excl JVs) Loss (without return) (5*7) Rs./mscm Rs./mscm Rs./mscm Rs./mscm Rs./mscm BCM Rs. Crore Rs. Crore 1083 4573 3164 -326 -1409 17.99 -587 (9.34%) -2535 (40.37%) 1205 4631 3147 -279 -1484 17.76 -496 (8.14%) -2,636(43.31%) 1311 5,870 3,191 -1,368 -2,679 17.71 -2,423 (30.01%) Under-recoveries (6*7) (with return) -4,745 (58.76%) Rs./mscm 3490 3426 4,559

Source: www.indiapetro.com The gas price differentiation in Indias gas market is shown in table below
Table 34: Gas Price Differentiation on the Indian Gas Market (2010)

Source: IEA

The previous wide disparity between APM prices and non-APM prices, whether for gas from preNELP or NELP, has narrowed. Under long-term contract, LNG is at a middle point between APM 82

Investment Prospects in City Gas Distribution in India

and non-APM prices but gas sold under the new long-term contracts is likely to be more expensive. Spot LNG prices are usually the highest but depend on global market conditions29.

Regulatory Aspect of City Gas Distribution Regulatory Framework of PNGRB Act

It is believed that the Central Government is proposing the following amendment in PNGRB Act, 2006.

Reference paragraph of the Note 2.1

Section(s)

Proposed Amendment

16

Only the entities authorized or approved by the Central Government, immediately before the appointed day, shall be deemed to have authorization. Further, the Central Government, in consultation with PNGRB, will take appropriate decisions regarding CGD entities, which have undertaken certain work before the appointed day without being authorized by the Central Government.

2.2.1 to 2.2.8 2.3

2(d), 11(c), 16, 17, 19, 20 21& 61 (2) (r) 2(zc) (Definition) Sections 1(4) 2 (j), 2 (m), 2(q), 2(x), 2(zi), 2 (zn) ll(b)(iii), 11(h), ii(i), 12(l)(a), 12(l)(b), 14(1) (a) (iii), 15 (l)(c), 18, 20(1), 20(5), 21(1) 24(2),

Removing authorization of trunk natural gas pipelines from the purview of the Act. Petroleum products and natural gas could be notified for different Sections of the Act from time to time. Further, any reference to "Notified petroleum products and natural gas" in any such provision shall be construed as being effective from the date of such notification. It is also proposed to prefix "notified" to

29

Natural Gas in India, IEA, 2010

83

Investment Prospects in City Gas Distribution in India

49, 51, 52,61(2) (d) & 61(2) (h) 2.4.1 & 2.4.2 12 & Chapter V

"petroleum products and natural gas" in various Sections PNGRB should not adjudicate upon Government Policy & decisions and actions taken by entities in compliance of Government policy & decisions. The Board's power to settle disputes and complaints should be limited to the functions of the Board as provided under Section 11 of the Act.

2.5.1 & 2.5.2

H(g) & 61 (2) (g)

The Board will levy fees and other charges to be determined by Rules to be framed by the Government and not through Regulations notified by PNGRB.

2.6

Inclusion of Section 42 A

To include the following provision for supersession of Board in line with Section 17 of the SEBI Act, 1992, Section 19 of the IRDA Act, 1999 and Section 56(1) of the Competition Act, 2002:Power of Central Government to supersede the Board 42 A (1) If at any time the Central Government is of opinion(a) that on account of grave emergency, the Board is unable to discharge the functions and duties imposed on it by or under the provisions of this Act; or (b) that the Board has persistently made default in complying with any direction issued by the Central Government under this Act or in the discharge of the functions and duties imposed on it by or under the provisions of this Act and as a result of such 84

Investment Prospects in City Gas Distribution in India

default the financial position of the Board or the administration of the Board has deteriorated; or (c) that circumstances exist which render it necessary in the public interest so to do, the Central Government may, by supersede the Board for such period, not exceeding six months, as may be specified in the notification. (2) Upon the publication of a notification under sub-section (1) the Board, (a) all the members shall, as from the date of supersession, vacate their offices as such; (b) all the powers, functions and duties which may, by or under the provisions of this Act, be exercised or discharged by or on behalf of the Board, shall until the Board is reconstituted under sub-section (3), be exercised and discharged by such person or persons as the Central Government may direct; and (c) all property owned or controlled by the Board shall, until the Board is reconstituted under subsection (3), vest in the Central Government. (3) On the expiration of the period of supersession specified in the notification issued under subsection (1), the Central Government may reconstitute the Board by a fresh appointment and in such case any person or persons who vacated their offices under clause (a) of sub-section (2), shall not be deemed disqualified for appointment: Provided that the Central Government may, at any time, before the expiration of the period of supersession, take action under this sub-section. 85

Investment Prospects in City Gas Distribution in India

(4) The Central Government shall cause a notification issued under sub-section (1) and a full report of any action taken under this section and the circumstances leading to such action to be laid. before each House of Parliament at the earliest.

2.7.1 to 2.7.3

Section 40(2)

The Explanation in Section 40(2) is as follows:"For the removal of doubts, it is hereby declared that the decisions of the Board taken in the discharge of its functions under this Act, being matters appealable to the Appellate Tribunal, shall not be subject to audit under this section." As the above Explanation curtails the scope of CAG's audit and CAG has also complained about the same, it is-proposed to amend the said Explanation as follows:"Orders of the Board under Section 12 and Chapter V of the Act shall not be subject to audit under this Section".

2.8.1 & 2.8.2

2(d), 11(b) and 15

Section 11(b)- The Board shall (b) register entities only by obtaining information to (i) market notified petroleum products or natural gas; (ii) establish and operate liquefied natural gas terminals; (iii) establish storage facilities for notified petroleum products or natural gas exceeding such capacity as may be prescribed by the Central Government Suitable modifications in sub-section 86

Investment Prospects in City Gas Distribution in India

(3) & (4) of Section 15. Further, Section 2(d) of the Act needs to be amended, so that "authorized entity" means only an entity authorized by the Board under Section 16 and not an entity registered by the Board under Section 15. 2.9 ll(i) & 61 (2) (h) Proposed to be deleted, since OISD is to be empowered to handle the complete functions of laying, down of technical standards & specifications, including safety standards. 2.10 Preamble & Sections 1(4), 2(b) & 24. Refining and Processing activities to be deleted from the provision. (Safety issues are proposed to be brought under the purview of Oil Industry Safety Directorate). 2.11 Preamble and Sections 1 (4), 2 (d) (A) (0, 2 (j), 2(j) The word "Petroleum" to be deleted, since, as defined in the Act, "Petroleum" means crude oil.

0), 2 (m), 2 (p), 2(q), 2(x), Transportation of crude oil is an upstream activity 2(w), 2(zc), 2 (zk), 2(zi) (ii), 2 (zn), 11(b), 11(f), 11(h), ll(i),12(l)(a), 12(l)(b), 14 (1), 18,20(1), 20(5),. 21(1) 24(2)(a), 24(2)(b) 42(2), 43(1) 46,49,51(1), 52(/) (d) (i), 61 (2) (d), 61(2) (h), 63(1). 2.12 58 (Delegation) Delegation of powers of PNGRB should not extend to core powers of the Board to issue authorizations and to settle complaints, apart from the exceptions already provided. Further, amendment of typographical error, as settlement of 87 and, as such, does not fall within the purview of the downstream regulator.

Investment Prospects in City Gas Distribution in India

disputes is covered under Chapter V of the Act. 2.13 25(3) (Filing of complaints) Amendment for a typographical mistake; to be read as sub-section (2) of section 24 in place of sub-section (2) of section 27. 2.13 4(2) '...selecting the Chairperson and other members of the Board...' in place of '...selecting the Chairperson and after members of the Board...'.
Source: PNGRB & Infraline

Pricing of CNG and PNG International oil prices have been volatile in the recent past. The Indian basket of crude oil had gone up to an unprecedented level of 142.04 US$/bbl on 3.7.2008 before declining sharply to 35.83 US$/bbl on 24.12.2008. However, during the recent months, the price of the Indian Basket of crude oil has shown an upward trend and has increased from 40.61 US $/bbl in December 2008 to 69.03 US $/bbl in June 2009 (up to 26.6.2009). As informed by City Gas Distribution (CGD) Companies, prices of CNG have been increased in the last twelve months as follows: Name of the entity Name of cities Price of CNG (prior to revision) (per kg) Indraprastha Gas limited (IGL) Central UP Gas Ltd. (CUGL) Green Gas Ltd. Lucknow Rs 27 Rs 29 7.4% January 2009 Kanpur and Bareilly Rs 27 Rs 29 7.4% January 2009 NCT of Delhi Rs 18.90 Price of CNG (after to revision) (per kg) Rs 21 11% June 2009 Increase Year/month of revision

88

Investment Prospects in City Gas Distribution in India

(GGL)

Agra

Rs 28

Rs 33

17.8%

December 2008

Bhagyanagar Gas Ltd. (BGL)

Vijaywada Hyderabad

Rs 24 Rs 33

Rs 25 Rs 35

4.2% 6%

January 2009 January 2009

CGD Companies have informed that the increase has been necessitated on account of sourcing of non-APM gas and increase in operating expenses. Prices of CNG have not been increased in the last twelve months in Mumbai (and suburbs), cities/towns in Gujarat, ONEIDA, Pune, Indore and Ujjain. Government policy is to encourage supply of CNG to large number of cities, so as to improve the quality of air and to bring down air pollution. Ministry of Petroleum & Natural Gas has finalized 'Vision-2015' of the oil sector for 'Consumer Satisfaction and Beyond', wherein 200 cities are to be provided CNG by the year 2015. CNG has been available in the cities of Delhi and Mumbai for quite a few years. Delhi has the largest fleet of public transport vehicles running on CNG in the entire world. A few years back, Delhi had a serious problem of smog and pollution. The comparatively clear skies of Delhi are, in a large measure, because of the use of CNG fuel. Further, CNG is available in a large number of cities in Gujarat, including inter alia Ahmedabad, Bharuch, Ankleshwar, Vadodara, Gandhinagar, Rajkot and Surat. CNG is also being supplied in Vijayawada, Hyderabad, Bareilly Kanpur, Lucknow, Agra, Indore, Ujjain, Pune and Agartala. International oil prices have been volatile in the recent past. The Indian basket of crude oil had gone up to an unprecedented level of 142.04 US $/bbl on 3.7.2008 before declining sharply to 35.83 US $/bbl on 24.12.2008. However, during the recent months, the price of the Indian basket of crude oil has again started showing an upward trend and has increased from 40.61 US $/bbl in December 2008 to 69.03 US $/bbl in June 2009 (up to 26.6.2009). There is no direct linkage between crude prices and prices of CNG. The price of CNG is determined more by the category of natural gas sourced. At present, there are broadly two pricing regimes for gas in the country - gas priced under Administered Pricing Mechanism (APM) and non-APM or free market gas. The price of APM gas is set by the Government. As regards non89

Investment Prospects in City Gas Distribution in India

APM/free market gas, this could also be broadly divided into two categories, namely, imported LNG and domestically produced gas from New Exploration Licensing Policy (NELP) fields and pre-NELP Joint Venture (JV) fields. While the price of Liquefied Natural Gas (LNG) imported under term contracts is governed by the Sale Purchase Agreement (SPA) between the LNG seller and the buyer, the spot cargoes are purchased on mutually agreeable commercial terms. As regards pre-NELP JV gas, its pricing is governed in terms of the provision of Production Sharing Contracts (PSC). Substantial gas production has commenced from the gas fields given by the Government under the NELP. Empowered Group of Ministers constituted by the Government to consider inter alia issues pertaining to pricing of natural gas produced under the NELP has approved the price of gas produced from NELP fields. CNG is sold by City Gas Distribution Companies, none of which are Central Public Sectors Undertakings (CPSUs), and approval of the Government is not needed for determining the prices of CNG. However, IGL has informed that it had to increase the price of CNG, because, on account of increase in demand, it had to source relatively expensive gas, over and above 2 mmscmd gas made available at APM rates. Further, there was increase in operating expenses in the last three years, since the last increase in CNG prices by IGL. Similarly, other CGD Companies have also informed that the increase in CNG prices has been necessitated on account of sourcing of non-APM gas and increase in operating expenses.
Table 35: CNG Price as on April 2009

City Agra Ahemdabad Anand Bareilly Chotila Delhi Dhaban Greater Noida

CNG Price (Rs/Kg) 28 28.62 28 29 28 21 28 22.1

90

Investment Prospects in City Gas Distribution in India

Hazira Hyderabad Indore Kalol Kanpur Khambhat Lucknow Mira Bhayandar Morbi Mumbai Nadiad Navi Mumbai Navsari Noida Pune Rajahmundery Rajkot Surat Thane Ujjain Vadodara Valsat Vapi Vijayawada Price of CNG in Delhi:

28 35 32 28 29 28 27 21.82 28 21.7 28 22.23 28 22.1 28 27 28 27.5 22.14 33 27.33 28 28 25

At present, CNG is being sold in Delhi at a consumer price of Rs 21.00/kg with the following break-up.

91

Investment Prospects in City Gas Distribution in India

Particulars Basic Price Excise Duty @ 14% Education Cess @ 3% of the Excise Duty Increase in Gas Cost due to purchase of Non-APM Gas Increase in operating cost Excise duty and Education Cess @ 14.42% Total Cost

Rs 16.52 2.31 0.07 1.45 0.38 0.26 21.00

Legal Framework of Natural Gas Sector in India Regulatory Framework under the PNGRB Act, 2006 Under PNGRB Act, regulatory framework is summarized as under: PNGRB (Determination of network tariff for city or local natural gas distribution networks and compression charge for CNG) Regulations, 2008 PNGRB (Exclusivity for city or local natural gas distribution network) Regulations, 2008 PNGRB (Authorizing entities to lay, build, operate or expand city or local natural gas distribution network) Regulations, 2008 PNGRB (Technical Standards and Specifications including Safety Standards for City or Local Natural Gas Distribution Networks) Regulations, 2008 PNGRB (Determination of network tariff for city or local natural gas distribution networks and compression charge for CNG) Amendment Regulations, 2008 PNGRB (Authorizing entities to lay, build, operate or expand city or local natural gas distribution network) Amendment Regulations, 2008 Regulation for CGD Policy for Development of Natural Gas Pipeline and City or Local Natural Gas Distribution Networks, December 2006 Regulation for Access Code for Natural Gas Transmission Pipelines and City or Local Natural Gas Distribution Networks, December 2007 92

Investment Prospects in City Gas Distribution in India

Regulation for Pipelines Gas Utilisation Policy - MoPNG Pricing and commercial utilization of natural gas under new exploration licensing policy MoPNG The Oilfields (Regulation and Development) Act, 1948 The Petroleum and Natural Gas Rules, 1959 amended by the Petroleum and Natural Gas (Amendment) Rules, 2003, The Petroleum Act, 1934 The Petroleum Rules, 2002

Figure 16: Timeline of PNGRB Regulations

Source: Source: Presentation by Nitin Zamre, Director Consulting, CRISIL Infrastructure Advisory 8th Petro India, November 25, 2009

93

Investment Prospects in City Gas Distribution in India

Brief Overview of Various PNGRB Gazette Notifications Following are some of the PNGRB Gazette Notifications for City Gas Distribution Network No. NIL 19/03/2008 No. G.S.R. 197(E) 19/03/2008 Determination of network tariff for city or local natural gas distribution networks and compression charge for CNG Attachment for CGD network tariff

No. G.S.R. 198(E) 19/03/2008 No. G.S.R.196(E) 19/03/2008 No. G.S.R.340(E) 06/05/2008 No. G.S.R. 197(E) 19/03/2008 No. G.S.R.541(E) 17/07/2008

Exclusivity for city or local natural gas distribution network

Authorizing entities to lay, build, operate or expand city or local natural gas distribution network Authorizing entities to lay, build, operate or expand Natural Gas Pipeline Determination of network tariff for city or local natural gas distribution networks and compression charge for CNG Access code for common carrier or contract carrier natural gas pipelines.

Role of PNGRB in CGD Further, the Government of India has enacted the Petroleum & Natural Gas Regulatory Board Act, 2006(PNGRB Act, 2006) via Gazette Notification dated 31st March, 2006. Accordingly, in line with the provision of the Act, the Petroleum and Natural Gas Regulatory Board (PNGRB) was constituted with effect from 01st October 2007. The PNGRB is reputable for regulating the refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas excluding production of crude oil and natural gas. It aims to protect the interest of consumers and entities engaged in specified activities, ensure uninterrupted and adequate supply and promote competitive markets for petroleum, petroleum products and natural gas. 94

Investment Prospects in City Gas Distribution in India

As per the regulation, PNGRB will regulate only the city gas pipeline network tariff. The end gas price to the consumers is not covered in the regulation. Any entity authorized by the Central Government at any time before the appointment of PNGRB does not require to obtain authorization from PNGRB. The statutory requirement for such entity is only to furnish the particulars of its CGD activities to PNGRB. PNGRB has already issued regulations for growth and expansion of the oil and gas industry and is further paving the way for growth of this sector, balancing the interest of various stakeholders such as gas suppliers, manufacturers of equipment, consultants, contractors and users. The Board notified 13 regulations on October 1, 2007, out of which 7 are related to city gas distribution (CGD). It was notified to authorize entities to lay, build, operate and expand CGD network and determine network tariff for CGD on March 19, 2008. According to the scope of these regulations, a CGD network shall normally operate at a pressure as per the mandated code/standard by the Board, presently not more than 19 Kg/ cm2 (g) and for supply of a volume not exceeding 50,000 SCMD per consumer per annum. The consumer shall have the option to source natural gas for volume exceeding 50,000 SCMD from any entity (including the entity laying, building, operating or expanding a CGD Network), but not through the CGD network. Marketing and Infrastructure Exclusivity The entity winning the rights to set up CGD network in a city will have five-year marketing exclusivity. After five years, the network will be thrown open to competition but a fresh entrant will not be allowed to lay a new pipeline. It will have to use the network for which it has to pay a fee to the CGD Company. The CGD Company will have lifetime exclusivity of 25 years for the pipeline network. However, a company that has operated the CGD network for three years or more prior to the appointment of PNGRB i.e. 1st October 2007, will have the marketing exclusivity for three years compared with five years for firms that will operate in the cities to be authorized by PNGRB now. Eligibility Criteria Entities interested in obtaining rights to set up a city gas distribution network would need to meet the following eligibility criteria: a. Body Corporate or Company registered under the Companies Act 95

Investment Prospects in City Gas Distribution in India

b. Should have a credible plan for sourcing of natural gas c. Should have experience of laying aggregate of over 300 km of oil or gas pipelines or form a joint venture with a company which has that experience d. The entity should have experience of at least one year in operation and maintenance of a CGD network Or Should have a joint venture with 11% holding with another entity having such experience Or The entity should intend to operate and maintain the proposed CGD network through appropriate Technical Assistance Agreement for at least three years with another party having experience of operating and maintenance of CGI network for at least a period of three years Or The entity should have adequate number of technically qualified persons with 0 ft M experience of hydrocarbon pipeline and a credible plan to independently take up the 0 & M of CGD network In the explanatory note to the above in the PNGRB notification, it is further stated that the entity should have a minimum of three personnel having experience of at least one year in (i) ROU acquisition, design & execution of pipeline, pre-commissioning and safety aspects and (ii) operation & maintenance of gas pipeline and compressors, gas measurement & accounting and safety aspects. Process of Authorization An entity interested in developing a particular city gas project needs to submit "Expression of Interest" to PNGRB with the following documents: a. Rs 8-12 lakh as fee depending upon population of the city (non-refundable) b. Geographical area of the city to be covered in the business plan c. Market potential of Compressed Natural Gas (CNG) for Automobile/Piped Natural Gas (PNG) for domestic consumption/industrial consumption d. Likely business plan without divulging business secret e. Credible Gas Sourcing Plan On receipt of EOI from an interested entity, PNGRB shall issue an open advertisement for public consultation to firm up the authorized area of the city gas project. PNGRB as suo-moto may also 96

Investment Prospects in City Gas Distribution in India

select a city for the city gas project. Upon firming up the area, PNGRB will start the process for open bidding from interested city gas entities. The interested entities are required to submit bid with the following: a. Rs 8-12 lakh as fee for submission of bid (for the bidder other than the entity that has already submitted the fee along with EOI) b. Bid Bond (Rs 0.5 crore to Rs 5.0 crore depending upon population of the city) c. Credible Gas Sourcing Plan d. Detailed Technical Plan e. Detailed Financial Plan, which includes network tariff, compression charge for CNG, inchkm of pipeline network and number of domestic connections over a period of pipeline exclusivity The authorization shall be granted to the selected entity within a period of 30 days from the last date of submitting the bid. The award will be on the overall best offer basis considering the following criteria: Parameters Lowness of the present value of the overall unit network tariff over the economic life limited to 25 years from the date of authorisation, for each year of economic life. Lowness of the present value of the compression charge for CNG over the economic life of the project, which they have to bid for each year of economic life. Highness of the present value of the inch-km of steel pipeline during the period of marketing exclusivity Highness of the present value of number of PNG domestic connection during the period of marketing exclusivity Post Authorization a. Assignment/Transfer of the Authorization: The grant of authorization to the entity shall not be renunciated by way of sale, assignment, transfer or surrender to any person or entity during the period of three years from the date of its issue. 30% 20% 10% Weightage 40%

97

Investment Prospects in City Gas Distribution in India

b. Performance Bond: Upon successful award of the Authorization, the entity shall furnish a performance bond of an amount equal to Rs 1.10 crore (depending upon population of city) or 5% of estimated project cost, whichever is higher. c. Financial Closure: The authorized entity is required to obtain the financial closure of the project from a bank or financial institution within a period of 180 days from the date of the authorization In case of internally financed project, (the authorized entity is required to submit the approval of its Board of Directors for the DFR of the project along with its financial plan within 180 days of the authorization). d. Natural Gas Tie-up: The authorized entity is required to enter in to a firm natural gas supply agreement for the proposed CGD network with an entity owning natural gas for at least 50% of the volumes considered in the determination of the network tariff bid up to the marketing exclusivity period (i e 5 years) within 120 days of issue of the authorization. e. Service Obligations: The authorized entity has the following service obligations: i. ii. iii. Provide domestic PNG connection as per the bid Lay and build steel pipeline as per the inch-kilometer bid Reach all areas or wards in the authorized area through pipelines of adequate size to meet the demand of the consumers iv. Provide piped natural gas connection on demand to a domestic consumer for cooking purposes within a distance of 25 meters of the metering unit at the consumer's end till the tap-off in the pipeline f. Penalty: In case of default in abiding by the terms and conditions of regulation/service obligation, PNGRB has the right to encash 25% of the amount of the performance bond for the first default and 50% of the amount of the performance bond for the second default. In case of third default, PNGRB may encash 100% of the amount of performance bond and simultaneously terminate the authorization of the company. Further, PNGRB may also levy civil penalty on the authorized company in addition to the penalty described above. Un-bundling of the CGD Business So far, PNGRB has not made any mandatory provision for un-bundling of the CGD business from the regular business of an entity However, the authorized entity is required to ensure that 98

Investment Prospects in City Gas Distribution in India

a. there is no cross-subsidization of the costs between the activity of transportation and the activity of marketing of natural gas in the CGD network; b. the confidentiality of customer information collected in the course of providing CGD service is maintained; and c. there is no preferential access allowed to itself or to any other entity for the activity of transportation of natural gas in the CGD network. Grant of Authorization The entities and cities to which authorizations have been issued by Government for CGD (as on February 2009) are as follows:S. No 1. Mahanagar Gas Limited Mumbai and district Thane including Navi Mumbai & Mira-Bhayander 2. Indraprastha Gas Limited Delhi and its suburbs, viz., Noida (Gautambudh Nagar), Gurgaon and Faridabad 3. 4. Bhagyanagar Gas Limited Vijayawada & Hyderabad JVC Area of Operation

Tripura Natural Gas Company Agartala Limited

5.

Maharashtra Natural Gas Limited

Pune including Pimpri & Chinchward

6. 7. 8. 9.

Aavantika Gas Limited Sabarmati Gas Ltd. Green Gas Limited Gujarat Gas Company Limited

Indore, Ujjain & Gwalior Gandhinagar, Mehsana & Sabharkantha Lucknow, Agra Surat, Bharuch & Ankleshwar

10. 11.

Central UP Gas Limited GAIL (India) Ltd.

Kanpur & Bareilly Vadodara

99

Investment Prospects in City Gas Distribution in India

Other entities supplying CGD to the cities:S. No. 1 2 3 Adani Energy Limited, HPCL Vadodara Mahanagar Seva Sadan 4 5 GSPC Assam Gas Company Limited Rajkot, Morbi, etc. Duliajan, Digboi, Tinsukia, Dibrugarh, Naharkatia, Moran, Nazira, Sivsagar etc. Ahmedabad Ahmedabad Vadodara JVC Area of Operation

PNGRB has considered the authorization granted by Central Government to 3VI/S Indraprastha Gas Limited (IGL) for city of Delhi to lay, build and operate city gas distribution network, and has allowed IGL exclusivity for 3 years. IGL has submitted its documents pertaining to the cities of Faridabad, Gurgaon and Gautambudh Nagar (Cities of Noida and Greater Noida) to PNGRB on the basis of authorization granted by Central Government. Further IGL has applied to PNGRB for Ghaziabad, which is being considered by PNGRB. PNGRB has also considered authorization granted by Central Government to MGL for Greater Mumbai and allowed exclusivity for 3 years. MGL has submitted document, for district Thane, including Mira-Bhayendar and Navi Mumbai to PNGRB on the basis of authorization earlier granted by Central Government. IGL has plans to cover NCT of Delhi, Noida/Greater Noida/Ghaziabad (U.P.), Faridabad/Gurgaon/Sonepat/Panipat (Haryana) with PNG supplies in phases spread over next few years subject to necessary approvals from appropriate authorities.

Taxation Issues Related to City Gas Distribution Fiscal aspects in CGD DEVELOPMENT PHASE Income tax Capitalization of expenditure incurred on construction of pipelines Interest cost during construction period eligible for capitalization? Depreciation on capitalized costs for pipelines: o Depreciation under the Companies Act, 1956 at 13.91 percent o Depreciation under Income tax Act, 1961 (IT Act) at 15 percent 100

Investment Prospects in City Gas Distribution in India

Indirect tax Customs duty on imported equipment Imports may qualify as Project imports custom duty leviable at blanket rate of 5 percent, irrespective of rate on individual equipments FINANCING AND INVESTMENT PHASE The funding options available are equity shares and preference shares and debt financing through external commercial borrowings / local debts Equity Equity is the most common funding source. Distribution of dividends on (equity / preference) subject to a dividend distribution tax (DDT) at 16.995 per cent. Taxability of capital gains on sale of shares: In case of listed companies: The long term capital gains are exempt while short-term capital gains are taxable @ 11.33 per cent for residents and @ 10.56 per cent for NRIs. In case of unlisted companies: Long-term capital gains taxable at 22.66 percent for residents and 21.12 percent for non-residents. Short-term capital gains taxable at 33.99 percent for residents and 42.23 percent for non-residents. Non-resident investors may claim treaty benefits

OPERATION PHASE Income tax A ten year tax holiday under section 80-IA of the IT Act for laying and operating cross-country natural gas distribution network. Minimum AlternateTax (MAT) payable at 11.33 percent on book profits during tax holiday period. Key considerations /issues in tax holiday for CGD operation: The phrase cross-country not defined whether CGD network would qualify as cross-country distribution network At least 1/3rd of total pipeline capacity to be made available for use on common carrier basis by persons other than assessee or any associated person

101

Investment Prospects in City Gas Distribution in India

Indirect tax Excise duty: Compressed Natural Gas (CNG) compression amounts to manufacture; excise duty payable; CENVAT credit available in respect of pipelines / other capital goods (whether inside or outside the factory) / inputs used in relation to transportation / manufacture of CNG Piped Natural Gas (PNG) There is no manufacturing involved hence no excise duty payable and CENVAT credit available in respect of pipelines / other capital goods used exclusively for transportation/ in relation to PNG Value Added Tax 1. Sale of natural gas (CNG /PNG) liable to VAT - VAT legislation in the respective State provide for rate /exemption, if any. 2. Credit of (input) VAT may be available in respect of materials used for the pipeline network utilized for transporting CNG (since compression on natural gas amounts to manufacture) 3. No VAT credit available in respect of material used for the pipeline network utilized exclusively for supply /transportation of PNG to end consumers Key Developments 1. Possibility of availing Declared goods status for VAT purposes 2. CST on inter-state procurement 3. Service tax payable in relation to common carrier capacity, if any

Global Practices in City Gas Distribution Globally, the use of natural gas in the road-transport sector remains negligible, even though natural gas vehicle (NGV) technology has been around for a long time and is well established in some countries. Worldwide, there were an estimated 9.6 million NGVs on the roads in 2008, mainly in Pakistan, Argentina, Brazil, India, Iran and Italy.3 The majority are cars, but buses account for much of the consumption, and two- and three-wheelers powered by compressed natural gas (CNG) are prominent in Pakistan, India and some Southeast Asian countries. South America alone accounts for almost 40% of total consumption. Most light-duty NGVs are converted gasoline-powered vehicles, though an increasing number of vehicles worldwide are being manufactured to run on CNG. 102

Investment Prospects in City Gas Distribution in India

In most cases, gas as a transport fuel (in compressed or, less commonly, in liquefied form) was introduced as a means of monetising abundant local supplies, but the environmental benefits of gas over gasoline and diesel have helped drive up demand in recent years. Compared with vehicles with a conventional engine, NGVs emit fewer noxious and toxic air pollutants, and generate lower CO2 emissions on a well-to-wheels basis (Gielen and Unander, 2005). In an effort to combat local air pollution, some large cities have turned to NGVs. For example, all public transport vehicles in Delhi are required to be powered by CNG. Interest in promoting NGVs is growing in the United States, driven by low prices and the perception that indigenous supplies are ample. Despite the environmental advantages of NGVs over conventional vehicle and fuel technologies, expanding the NGV fleet faces several barriers, including fuel storage and making available the infrastructure for delivery and distribution at existing refueling stations. On the vehicle, natural gas must be stored in cylinders, thus reducing storage space. The absence of an existing fueldistribution network also discourages the uptake of NGVs a classic chicken-and-egg problem. For these reasons, public buses and other fleet vehicles, such as taxis, are likely to continue to dominate the use of gas for road transport. More stringent emissions standards could encourage faster deployment of NGVs, especially in countries with abundant gas resources and low prices. In countries with an established distribution network, NGVs are likely to maintain their market share. But countries that do not yet have an extensive fuel-distribution infrastructure are likely to favour other alternative fuels, notably biofuels and electricity, in the quest to decarbonise the roadtransport system because the required investments are smaller and the potential environmental gains greater. The transport sector accounts for a small share of gas use. At present, oil and gas pipeline compressors take more than four-fifths of the gas used for transport. This source of demand is expected to continue to grow as global gas use rises, but at a much slower rate (0.4% per year between 2007 and 2030, compared with global primary gas demand growth of 1.5%). This is because pipeline transportation capacity grows less rapidly than liquefied natural gas (LNG) capacity (see Chapter 12) and because the efficiency of compressors is expected to improve. In contrast, the use of gas as a road-transport fuel, which currently accounts for only 1% of total final gas consumption worldwide, is expected to grow at a brisk 3.7% per year to 2030, with most of 103

Investment Prospects in City Gas Distribution in India

the growth coming from non-OECD countries (which already account for most gas use for road transport).

104