Major pipeline projects approved but no investment yet: Anindya Chowdhary

Interview with General Manager (gas), Shell India

While the Narendra Modi government is keen on expanding city gas distribution networks to cover major geographical areas, the absence of pipeline infrastructure is likely to be a major stumbling block in achieving the target, says Anindya Chowdhury, General Manager (gas), Shell India. In a conversation with Ishan Bakshi, Chowdhury talks about the problems facing the sector and the possible solutions. Edited excerpts:

There seems to be a push by the government on city gas distribution. What are the key challenges facing the sector?

The problem with city gas projects is that much of the investment comes upfront. And if your revenues don't stack up quickly, internal rate of return (IRR) becomes a challenge straight away. You have to convince people to switch. How quickly you rollout and convert (users to piped gas) is critical.

The bigger problem is supply of gas. You want to reach 200 cities, for that you need pipelines. This space has become challenging because of a number of reasons. One, a number of major pipeline projects have been approved but no investments have come through. Unless these pipelines come up, how are you going to connect the cities? Banks and investors will say, why should I put money on the ground when I can't see when the gas will come in. Nobody is entering long-term contracts. Buyers want short term contracts. But on that basis, such projects are not considered investment grade by banks.

Banks want to see that the asset is being used for the (entire) period of the loan. So they want someone who says that I want to buy gas for say 12 years and then someone who says I am going to sell gas for 12 years under all conditions. Otherwise, servicing the debt will be challenging.

Someone has to be willing to take that investment risk. Case in point is Gujarat. If you look at the national average, gas is only eight per cent of the energy mix. But in Gujarat, it is around 25 per cent. That is because the government made sure that their company invested in the pipeline network. Somebody had to take that risk. In many countries, such big players have built pipelines.

If you look at the Petroleum and Natural Gas Regulatory Board (PNGRB) approvals, most of the investments have not happened.

Do we have enough regasification capacity to meet the rise in demand?

Does India have all the regasification capacity it needs? My answer is no. But the question is not only that. It is the entire value chain. You need to have the pipelines. For example, Kochi is not able to supply because it does not have pipelines. So you need to have all the ducks in a row.

It is a bit of the chicken and egg problem. The sector requires a lot of investments which can not come up in isolation. All of them have to come together. And that's the problem, because different investors play in these segments.

The further downstream you go, the more bank financed it becomes. And banks look at risks. They want to see the pipelines and the buyer/s. In the case of city gas, banks want to see your customers. Unless all the pieces fall together, they are not going to sanction loans.

What are your views on the revenue sharing model?

Globally, Shell operates under both regimes. So our view is that both regimes work, as long as people make it work. You could have challenges in both systems. If moving to a revenue sharing contract makes it easier to run the contracts, then it is a step in the right direction.

How do you view oil and gas sector in India?

Contrary to public perception, there is evidence of activity happening, especially on the regulatory side. For example, the government has come out with a policy framework which was put out for consultation. We also understand there has been some movement on setting up the data repository. We are also hearing about open acreage license. These are all good signs. Niti Aayog has been asked to draft a national energy policy. So there is a lot of interest in developing a framework that will encourage investments.

How much of it will actually translate into investment grade policy? In the current global economic environment, where oil prices are where they are, a lot of companies are being more cautious about making investments. So there is sensitivity around timing. You may come out with a good policy but if the investment environment in the world is not very conducive, it will be challenging.