Supply uncertainty, EV push bring challenges to city gas distributors

Apart from hardships for domestic consumers using it for cooking, the rise in CGD prices indirectly has an impact on the government's goal of achieving 15% share of natural gas in the energy basket

One of the lesser celebrated stories in India is the city gas distribution (CGD), which expanded from just 17 per cent of the population in 2017 to 98 per cent today on the back of conducive government policies and aggressive investment by both private and public sector companies. Over the past year, Russia’s invasion of Ukraine plus some policy tweaks by the government could take the wind out its sails.

The 98 per cent population coverage implies these geographical areas are at various stages of execution and operations, as a majority were awarded in recent years. Several companies are starting work on the areas allocated to them, with industry estimates pegging investments and investment commitments to the tune of around Rs 1.5 trillion in the last five years.

CGD networks are an interconnected system of underground pipelines for supplying piped natural gas (PNG) for domestic and industrial purposes and compressed natural gas (CNG) for transportation. Supply disruptions, after the European Union turned to India’s traditional Gulf suppliers, have put pressure on prices. India imports around 48 per cent of its gas requirement from countries like Qatar, the United States and United Arab Emirates. Over the past year, prices of domestic CNG in Delhi alone increased by around 40 per cent and domestic PNG rose 50 per cent. At the same time, prices of domestic natural gas, for which CGD is given first priority, also rose 40 per cent.

Apart from hardships for domestic consumers using it for cooking, the rise in CGD prices indirectly has an impact on the government’s goal of achieving 15 per cent share of natural gas in the energy basket from around 6 per cent now. For one, the pace of conversion to CNG has almost halved in some areas.

Several other factors have added to this slowdown. The slowdown in the availability of domestic gas — known as APM gas or gas supplied under the administered price mechanism — is also responsible. Based on government data, out of 1,002 million metric standard cubic metres (MMSCM) of gas consumed by the city gas sector in December, around 15 per cent came from imports.

According to data available with the Petroleum Planning and Analysis Cell, between April and November 2022, the fertiliser industry, which uses natural gas as a feedstock for urea manufacture, accounts for 35 per cent of the total natural gas consumed in India, followed by CGD at 20 per cent and power at 14 per cent.

And, finally, the push for electric vehicles (EVs), with several states adding to central government subsidies, is also a cause of concern.

“The government should ensure that APM gas is available for the sector for at least five to seven years, so that the sector picks up. Benefits that are being extended for EVs should also be extended to CNG. Bringing natural gas under the GST regime should also be considered. Moreover, some kind of sops for the consumers for switching to CNG or CGD is required,” said Rahul Chopra, managing director of Haryana City Gas.

Most automobiles converted to CNG because of its competitive advantage over petrol and diesel, which has narrowed to Rs 17.16 a litre for petrol and around Rs 10 for diesel in Delhi now. “Higher PNG prices may also affect the switch from domestic liquefied petroleum gas (LPG) to PNG, albeit to a lesser extent than CNG. Nonetheless, infrastructure build-out at a large number of CGD GAs (geographical areas) should still support overall volume growth in the sector,” the Fitch Ratings report said.

This state of affairs is in sharp contrast to the rapid developments between 2017 and 2020. Till 2017, cooking gas networks, the legacy of the now-defunct Oriental Gas Company (it started in 1857 in then Calcutta), covered only 17 per cent of the population after eight rounds of bidding. The first round of bidding took place in 2008.

According to D K Sarraf, former chairman of the Petroleum and Natural Gas Regulatory Board (PNGRB), the game-changer was five years of industry-friendly approach by the government and aggressive investment by the private sector. Compared to previous rounds, which saw bidding for only five to 10 GAs, when the government opted for 86 GAs in the eighth round several questions were raised about whether they would be any more successful than earlier rounds.

But Sarraf, whose term ended as PNGRB chairman in December 2020, recalled that during that round, 400 bids were received — around five bids per GA. In 2023, after the completion of 11 A round of CGD, 295 GAs (91 by the end of the eighth round) covering 88 per cent of India’s total geographical area spread over around 630 districts, were covered under the CGD network.

“The major reasons for the rise in demand for CGD both from the corporate and consumer side are certain policy initiatives (like giving top priority to domestic gas). Now, CGD networks are being given the top priority in terms of domestic gas allocation, which includes even deep-water gas. In addition, the finalisation of bids and allocation took less than a month during the rounds since 2017. This compared to even three to four years in previous rounds,” Sarraf said.

As a result, the number of CNG stations in India increased from around 1,300 in early 2018 to 4,853 now, while PNG connections also increased from 4.1 million to 10 million in the same period, a Fitch Ratings report said. Based on the minimum work programme that companies have committed to, this may increase to 17,700 CNG stations and 123 million PNG connections by 2030.

Earlier, the sector was only about public sector units and its joint ventures (JVs); the last few rounds ensured larger participation from the private companies as well. At present, state-run Gujarat Gas is the largest in terms of existing sales, with 27 GAs under it. Adani Total Gas Limited (ATGL), a joint venture with France’s TotalEnergies, has 33 GAs under execution. Another 19 GAs are under execution at ATGL’s JV with Indian Oil Corporation (IOC), making the group the largest player in the segment. The other companies include IOC (26 GAs), Bharat Petroleum Corporation (25 GAs) and Megha City Gas (22 GAs), which is a diversified engineering group.

The constraints on gas supply have crimped this growth. “The city gas distribution sector has continued to witness demand growth, mainly for CNG and PNG (domestic) segments despite an increase in domestic gas prices because it remains competitive vis-à-vis alternative fuels like diesel, motor spirit and LPG though the conversion momentum has slowed down,” said Prashant Vasisht, vice-president and co-group head - corporate ratings, ICRA.

But the future of India’s transition to this clean fuel will need more than a shrinking price differential to stay on a high.