Policy air bubbles and implementation snags could block plans to connect India's cities to a clean fuel grid.

The official explanation is that the economic downturn had put a damper on proceedings because CGD are capital-intensive projects that take at least five years to provide returns. Experts estimate that investors would have to earmark close to Rs 500 crore per city, the conservative estimate being Rs 300 crore per city. That’s because gas requires a great deal of expensive infrastructure, much more than oil. Whatever the usage, complex pipeline networks have to be laid for the constant flow of gas.

Industry sources are reluctant to admit that investment is the main issue. The big concern is that in the fluctuating list of priority consumers for KG Basin gas, CGD has hovered between third and fourth spot after fertiliser, power and petrochemical projects. Although the uncertainty has been largely cut with a firm allocation of 5 million metric standard cubic metre per day (mmscmd) of gas to city-gas projects, there is a restriction that puts a huge question mark over the viability of these projects. According to the gas utilisation policy announced by the Empowered Group of Ministers (EGoM) last year, this gas is meant exclusively for domestic consumers through the piped natural gas (PNG) network and for compressed natural gas (CNG) supplies to public transport; supplies to industry are banned under the policy.

Companies say this will hurt viability since households, although larger in number than industrial consumers, pay much lower rates. The domestic sector entails a higher investment because of the dense pipeline network that is required, but the tariffs are much lower, and it is the cross-subsidisation that makes CGD profitable. The principle is similar to electricity tariffs where industrial and commercial users subsidise the domestic sector. The rationale for CGD pricing is that it is always benchmarked to the fuel that it is substituting. In other words, domestic consumers who will be switching from LPG cylinders to PNG will expect a commensurate drop in the tariff, just as vehicles moving from diesel and petrol to CNG need an incentive. The premium that industry can pay in switching from expensive naphtha, diesel and fuel oil to piped gas, however, is large and will provide the cream for CGD operators.

The Petroleum and Natural Gas Regulatory Board (PNGRB) has been lobbying hard to get this restrictive clause removed but has not succeeded so far. The counter-argument from the government that CGD will not be in a position to utilise the allocated 5 mmscmd this year ignores the crux of the profitability issue.

There are other concerns, too. Getting the host of local authorities whose permission is necessary for pipelines and installations could clear some of the fog of uncertainty over CGD projects. Delays and obstruction from the local authorities have been notorious for delaying projects in the National Capital Region where Indraprastha Gas Ltd (IGL), the authorised entity, has been struggling for necessary permissions despite being a state-owned enterprise. A single-window system could help speed up matters.

Industry has also suggested the creation of exclusive corridors for laying gas pipelines through the inclusion of CGD in the city development plan which could obviate some of the common problems. Some companies in the business are also seeking essential utility status for CGD.

But there are concerns, too, about the way the nascent CGD industry is shaping up. For consumers, the worry is about monopolies developing in a sector where players are few, and the big ones have entered into alliances that could stifle competition. The results of the first round of bidding for six cities have set alarm bells ringing. There were just eight companies in the fray and in the case of one city, Mathura, there was just one bidder — GAIL Gas. This fully-owned subsidiary of GAIL India has bagged four of the five bids and, unless a fresh bidder appears for Mathura, it could have five cities under its belt.

Last week, GAIL chairman U D Choubey announced that the public sector company had prepared a war chest of Rs 1,000 crore to establish CGD projects across the country. Its subsidiary GAIL Gas successfully trounced its partner firm IGL, in which it has a stake along with BPCL and the government of Delhi. Deep pockets and an established pipeline network that gives it a technological edge could put smaller companies out of the reckoning.

Analysts have also been taken aback by the fact that the market leader Reliance Industries Ltd (RIL) has responded rather gingerly to the bid. Its subsidiary, Reliance Gas Corporation, which had submitted Expressions of Interest for 60 cities last year, bid for just one of the six on offer, Kakinada — and not aggressively enough. It lost the bid to Bhagyanagar Gas, a joint venture of GAIL India, HPCL, the Andhra Pradesh Industrial Infrastructure Corporation and Kakinada Seaports, a feat that has left the market open-mouthed.

Interestingly, GAIL Gas did not bid for Kakinada. In March this year, Choubey had been quoted as saying that the public sector outfit would not be bidding against Reliance for the CGD business but would have an alliance on CGD under which the two companies would bid separately for different cities, and the winning company would take the other on board as a partner for executing such projects. This was reportedly in line with the MoU signed between GAIL India and RIL in 2007 for cooperation on pipelines and marketing.
 

GAIL Gas had submitted Expressions of Interest last year for seven cities, none of which overlaps with the 60 submitted by Reliance Gas. For consumers, this could be a worrying development although sources at the regulatory body say monopolies or cartels would be discouraged. With the PNGRB opening up seven new cities — Ghaziabad, Allahabad, Jhansi, Shahdol, Rajahmundry, Pondicherry and Chandigarh — the market and the regulators would be closely watching the outcome of the bidding, which closes in June.

They are also hoping that there will be more such surprises as the Cairn-BPCL joint venture. Cairn, which has gas and oil reserves in Rajasthan, threw its hat into the ring for Kota and Sonepat. Although it didn’t make the bid, the presence of more such companies would make the CGD business more competitive —and better for India’s emerging gas economy.

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