CGD segment in limbo

The government introduced the Petroleum and Natural Gas Regulatory Board to regulate and develop the City Gas Distribution business in India. However, the sector is still facing many challenges on its way, writes K Ravichandran.

The City Gas Distribution (CGD) business in India dates back to 1857 when Calcutta Gas Company and Bombay Gas Company commenced operations in Kolkata and Mumbai respectively. Subsequently however, the industry remained dormant till 1998 when regulatory intervention in the form of a Supreme Court order on conversion to gas and States’ support for environmental pollution abatement came as a shot in the arm for the CGD business. In 2007, the Government of India (GoI) set up a regulator, the Petroleum and Natural Gas Regulatory Board (PNGRB), which had, among other mandates in the hydrocarbon sector, the mandate of regulating and developing the CGD business. While the PNGRB outlined an ambitious vision of expanding the CGD network to over 300 cities in India and conducted competitive rounds of bidding which were aggressively contested, the sector has failed to take off as envisaged owing to several issues, some of which are discussed below.

Limitations and challenges

One of the primary constraints is the availability of cost effective natural gas in the country, supply of which has been severely hit in recent times due to the unexpected fall in output of Reliance limited’s KG-D6 block. KG-D6 gas production is likely to remain at subdued levels over the next couple of years. Further with respect to allocation of the gas available in KG D-6, the CGD sector already ranked fairly low in the priority list of the GoI with the fertiliser and power sectors getting the major share. Given these reversals in domestic supplies, the CGD companies have had to depend on high priced RLNG which has to a major extent dented the viability and economics of conversion from liquid fuels and discouraged voluntary conversion in both CNG and PNG segments. Accordingly, the volumetric sales projections of several CGD companies that had been awarded licences have gone awry leading to cash flow mismatches and impacting their debt servicing ability. The pricing of RLNG that Petronet LNG sources on long term basis is currently linked to Japan Customs Cleared (JCC) crude for the period January 2009-December 2013 with the prices be¡coming fully indexed to the previous 12-month JCC from January 2014 onwards. The current term and spot prices of R-LNG are in the vicinity of $12/MMBTU ex-terminal and are given the expected continuance of buoyancy in crude oil prices; RLNG is set to only get costlier. Accordingly, ICRA believes that the CGD sector will continue to face severe challenges in terms of accessing cost-competitive gas.

Delays in securing the necessary approvals have seen to be resulting in delays in execution of many CGD projects and have translated to time and cost overruns. Further, the CGD project is inherently characterised by a long gestation period as volume scale-up is slow with it taking anywhere between three to four years post CoD to reach a commercially viable level and up to nine to ten years to achieve a reasonable 50 per cent customer penetration level. The slow scale-up of sales coupled with large upfront capital outlay translates to a longish payback period of seven to eight years for any CGD project. However, as per the existing provision of the PNGRB Act, new entrants/incumbents enjoy monopoly with regards to network provision for 25 years but marketing exclusivity is available only for five years from the date of authorisation.

Regulatory issues

There have also been several legal/regulatory tussles affecting the sector with the Regulator PNGRB and operators/incumbents being at loggerhead with each other. The ensuing uncertainties have further adversely impacted the investment climate in the sector. The barring entities promoted by stronger sponsors, other players are struggling due to the above mentioned issues resulting in some consolidation trends emerging in the industry. On the regulatory front as well changes are likely which may give greater clarity on the powers of the Regulator and may result in a more orderly development of the sector.