Piping hot

With the Government of India (GoI) planning to invest more than Rs 840 billion on gas pipeline network, about 90 per cent of it will be spent on gas transmission & distribution. What´s more! Around 15,000 km of pipeline projects lined-up, better days are certainly ahead for pipeline manufacturers.

What lies ahead for the pipeline industry?
During the Eleventh Plan period (2007-2012), domestic players exceeded the planned capital expenditure outlay. They invested Rs 2,751.6 billion, 120 per cent of the planned target of Rs 2,289.9 billion. The upstream sector, which had the highest share in the planned capital expenditure, recorded approximately 129 per cent of the planned target. This has resulted in more than anticipated oil & gas reserves accretion. The downstream sector achieved around 104 per cent of its planned outlay target, primarily due to large investments made by IOCL, accounting for 51 per cent of the total expenditure.

During the Twelfth Plan period (2012û17), an outlay of Rs 3.4 trillion has been envisaged by Indian NOCs for the upstream and downstream sectors. The upstream sector is expected to account for more than Rs 1.8 trillion of this. The majority of the amount will be spent on conducting drilling and developing exploration and production wells. The state-run public sector undertakings (PSUs) are expected to spend approximately Rs 1.5 trillion on capacity augmentations in the refining and marketing space. Private players such as RIL and Essar Oil are also spending significant capital on their capacity additions.

Meanwhile, capital spending of Rs 1.2 trillion is projected across the natural gas value chain during the Twelfth Plan period. Investments worth Rs 439 billion are projected for capacity augmentation in gas trans¡mission pipelines. The balance is projected for new capacity additions in LNG terminals (Rs 313 billion) and the expansion of the CGD network (Rs 403 billion).

Growth drivers
The GoI and other stakeholders are encouraging investments to strengthen the midstream segment and address the significant unmet demand for gas. During the Twelfth plan, companies are likely to invest Rs 841.8 billion for expanding their gas pipeline network (including the CGD network). Around 90 per cent of this proposed investment will be used to expand the gas transmission & distribution network. Furthermore, the GoI has announced plans to build additional 15,000 km of gas pipelines to complete the construction of the gas grid via the public private partnership (PPP) route (see table: Planned pipeline projects in India).

Oil & gas is the largest end user of steel pipes and tubes, with pipelines being the major mode of transport for petroleum, oil and lubricant products. In 2011, about 46 per cent of petroleum, oil and lubricant products were transported through pipelines. The percentage is expected to increase to 53 per cent in 2017.

The increasing use of pipelines in oil & gas directly translates into higher demand for steel pipes. Crude oil, gas and product pipelines have grown at a CAGR of 10.5 per cent, 11.7 per cent and 4.7 per cent respectively over 2008û2012. Steel pipe commands the largest share in the oil & gas sector, primarily because of its high pressure resistance properties.

In terms of production, the production of steel pipes and tubes is estimated to have grown at a CAGR of 7.2 per cent over FY 2009û13 to 7.52 mt. At the same time, domestic consumption is estimated to have increased to 6.19 mt for the corresponding period. Steel pipes and tubes production is expected to grow by a CAGR of five per cent over the next three years. India remained a net exporter of steel pipes and tubes over FY09-13, with net exports amounting to Rs 59,600 million during FY 2013; however, imports of steel pipes and tubes increased at a CAGR of 7.3 per cent higher than the export CAGR of 2.5 per cent over the period FY2009-13.

Government initiatives
In order to complete gas grid across the country, about 11,900 km of pipelines have already been authorized by the Petroleum & Natural Gas Regulatory Board (PNGRB) of which 1,200 km of pipeline is under the bidding process by PNGRB. For completion of gas grid, 2,500 km of pipelines has been identified for development through PPP mode.

In the meantime, to work out the implementation of the Budget announcement, the Petroleum Ministry has identified various pipelines and spur line pipeline sections to be developed to complete the National Gas Grid. Further, the ministry has identified three pipeline sections of the total length of about 2,500 km for implementation through PPP mode with Viability Gap Funding (VGF). The ministry has approved a pipeline section (Ranchi-Talcher-Paradip) for implementation through PPP mode as a pilot project and the remaining two pipeline sections viz., Barauni-Guwahati-Agartala and Haldia-Paradip/Srikakulam would be considered through PPP mode with VGF after successful completion of the pilot project.

According to AK Srinivasan, Executive Director, Chief Corporate Finance, ONGC, the level of capex for the company will be in the range of about Rs 36,000 crore. And the same trend will be continuing for the next year also. That said, it´s not just the government that is encouraging pipeline projects, but the private players too are in the fray.

Cairn India, for that matter, plans to treble natural gas production from its predominantly oil-rich Rajasthan block to 3 million standard cubic meters per day by mid-2018. Cairn currently produces around 1 mmscmd of gas from the Raageshwari gas field in the Barmer district block RJ-ON-90/1.

In an application to the downstream regulator PNGRB is seeking approval to lay a pipeline to Gujarat for transporting gas. Cairn said it plans to drill a minimum of 42 more wells to augment and sustain the gas supply in the next three years. ´Drilling for new wells is expected to start in Q1 of FYs 2016-17 with contracting for drilling rig, related equipment and services at an advanced stage,´ the energy major said in the March application.

Cairn said it was further developing the field ´on a fast track basis to increase the gas production from the block to cater to the significant unmet demand for gas in the country´.

The gas produced from the Raageshwari Deep Gas (RGD) field would be gathered and treated at the proposed RDG terminal at Gudamalani in Barmer district, from where it would be evacuated through a new 194-km, 24-inch pipeline to the nearest available gas grid which is the GSPL´s Gujarat Gas Grid with connectivity at Palanpur terminal. For RIL´s Shahdol-Phulpur gas pipeline project, the company has completed 100 per cent land acquisition and RoU notification under PMP Act. It has also awarded all construction contracts. Meanwhile, for its Jamnagar refinery project procurements of mechanical tags, electrical, instrumentation and bulk material have been completed. Orders placed on vendors across the globe include the majors like L&T, GE Energy, Linde, Atlas Copco, Doosan, Sungjin, Flowserve, Elliot, Sumitomo, Siemens, ABB, Tyco, Invensys, etc.

In terms of equipment, over 7,000 pieces have been ordered, including 100 compressors, over 2,000 pumps and more than 150 columns and reactors. The company has ordered over 5,000 km pipes and 3 million flanges, fitting and valves. In addition, over 350,000 mt of structural steel has been ordered too. The company has already procured more than 6,000 pieces of electrical machinery and nearly 50,000 instrument tags.

Expanding CGD network
The use of natural gas in the residential, industrial and commercial sectors is rising on the back of favourable regulatory policies and cost benefits. The existing CGD network extends to 90 cities and covers 47 geographical areas (GAs). The network of distribution pipelines spans nearly 40,535 km. The total number of compressed natural gas (CNG) stations in the country has increased to 966 in FY14 from 617 in FY11, at a CAGR of 11.9 per cent.

PNGRB plans
to expand the CGD network through competitive bidding in more than 300 GAs in a phased manner, depending on the availability of natural gas. To expand the CGD network and boost competition, PNGRB has introduced amendments to existing bidding para¡meters in 2013 and 2014. It has also authorized three GAs-Bhavnagar, Jamnagar and Jalandhar-to go ahead with the third CGD round. In addition, it has invited bids for developing CGD networks in 14 cities under the fourth bidding round. Recently, PNGRB has extended the bidding deadline to September 2014 for the districts of Khammam, Nalgonda and Rangareddy and Medak in Telangana; Shahjahanpur in Uttar Pradesh; and Guna in Madhya Pradesh.

The Indian Government has raised the share of allocated domestic gas to 100 per cent of the requirement for CNG (transport) and PNG (domestic), up from the previous 80 per cent mentioned in the Gas Utilisation Policy. With this, it plans to reduce the dependence of CGD players on costlier LNG, as well as provides cheaper fuel to end consumers. Favourable policy is likely to encourage investment in the CGD sector. This, in turn, is expected to generate more opportunities for equipment companies.

Is TAPI viable?
Is Turkmenistan-Afghanistan-Pakistan-India (TAPI) viable? This is a big question which has been doing the rounds of several high-level committee in the recent past. According to a preliminary feasibility study, the cost of TAPI pipeline project is estimated to be around $7.6 billion. This was informed by the Minister of State (I/C) for Petroleum & Natural Gas Dharmendra Pradhan to Lok Sabha, recently. The 1,814 km long TAPI pipeline project is envisaged to supply 38 mmscmd of natural gas to India.

Meanwhile, for oil & gas experts, the project (TAPI) does not stand a chance. According to Debasish Mishra, Senior Director, Deloitte, it is not practical to implement this project because of geopolitical risks associated with it as it is passing through Pakistan, Afghanistan and starts in Central Asia, Iran or Egypt which is itself very challenging.

Another element which has brought to our notice was the insurance premium under sovereign countries is very high. ´No one is ready to fund this unless some sovereign country like Afghanistan or Pakistan ensures the safety of the pipelines passing through their region,´ says Mishra.

Growing natural gas transmission network
Despite accounting for around 38 per cent of the total pipeline network, India´s gas transportation infrastructure has historically remained inadequate due to limited availability of gas in the country and regional concentration of gas-producing fields and LNG import facilities (mostly in western India). As of March 2014, India had a natural gas transmission network of 15,340 km, with an aggregate transmission capacity of 390 million standard cubic metres per day (mmscmd). GAIL accounts for 70.7 per cent of the total pipeline network in India by length. PNGRB had also authorised GSPL and Andhra Pradesh Gas Distribution Corporation Limited to expand Mallavaram-Bhopal-Bhilwara-Vijaipur and build Kakinada-Srikakulam gas pipeline.

Key players

• The steel pipes and tubes industry is characterised by the presence of a large number of players, with the five key players accounting for 34 per cent of market share by production during FY12.

The key pipe manufacturers in India, by product offered, include:

• Seamless pipes: Maharashtra Seamless, Jindal Saw, BHEL, Remi Metals, ISMT ltd. Ratnamani
• HSAW / LSAW: Jindal Saw, Welspun, Man Industries
• ERW: Maharashtra Seamless, Jindal Pipes, BHEL, Surya Roshni, Welspun

Growth drivers

Strong pipeline additions planned and increasing last mile connectivity

• Increasing end-mile connectivity in the distribution of oil and gas and the construction of new pipelines to gather crude oil from new drilling sites situated at a large distance from refining plants are expected to drive demand for steel pipes.

Lower losses and transmission cost savings

• The increasing use of pipeline would help lower transmission costs and plug leakages from wastage and spilling during road or rail transportation. This would lead to better efficiency.

Pipeline Infrastructure and Regulation
Pipelines and distribution infrastructure is a key prerequisite for development of deeper oil and gas markets in the country.
At present, the sector is facing several challenges and issues which have been listed out in this analysis. Some of the issues and challenges faced by the sector are:
i. Planning: Under the current regulatory regime, there is a need for more centralized planning and coordination for long-term national grid development plan. The development of new pipeline networks is market driven (i.e. can be initiated by any interested public or private entity) and bid based. Though the initial proposal is finalized through a public consultation process, it can be backed up better with detailed techno-economic viability assessment. The viability of a pipeline network is critically depended on volume utilization, which in turn is linked to the availability of the gas resource. However, the current licensing regime may consider integrating the following key aspects more comprehensively:

• Optimization of existing infrastructure vs new proposals
• Inter-connectivity of regional pipelines
• Equitable development of pipeline networks across various regionals
• Certainty of gas availability (Domestic gas and LNG terminals) – status of development of new fields, financial closure of new LNG projects etc.

To ensure seamless and reliable planning and operation of the national gas grid, a single autonomous entity may be considered with authority to operate the grid while the ownership will continue to remain with respective pipeline owners.

ii. Viability: It is worthwhile to note that the inadequate pipeline network cannot enable creation of gas markets, thus providing viability gap funding for the development of pipeline networks is critical to accelerate the creation of the national gas grid. This is coherent with the stated objective of PNGRB Act 2006 which to ensure adequate supplies of natural gas in all parts of the country.

iii. Access: One of the key objectives of PNGRB Act 2006 is to facilitate open access on a non-discriminatory, fair and transparent basis to all the entities so as to promote competition and safeguard the consumer interest. The present terms and conditions may be reviewed for more flexibility to remove impediments to open access, particularly for consumers with short term or spot requirements. Further, Shippers today are paying high ship or pay and other penalty charges viz. imbalance and overrun charges due to dwindling gas supplies. Such charge penalties load the cost of transportation of gas, particularly in the current scenario of uncertain supplies. In November 2012, PNGRB issued a guideline namely ´PNGRB (Development of Model GTA) Guideline 2012´ intended to create a basic framework whereby various provisions of the GTAs executed between transporters and shippers of natural gas ensure adherence to the principles of uniformity and equity for promoting fair play.

iv. Tax and tariff: The existing zonal pipeline tariff regime in the current multiple pipeline networks and complex distorted tax systems (tax rate varies from 2-26% for same location depending on mode) results in severe artificial cost distortions for consumers, resulting in their continuation with environmentally harmful fuels. The ´pancaking´ of tariffs across pipeline systems and segment results in higher cost of transportation of gas (~58% of the gas price @$4.2/ MMBTU). The true benefits of integrated national gas grids can be better realized with a suitable tariff system that promotes transparent and fair pricing of transportation service is in place. Moving towards a rationalized cost reflective utilization based tariff mechanism would enable the creation of gas markets in the country. Further, harmonization of taxes could bring in efficiency in the delivery cost of gas which could further improve the viability and trade of gas.

Authored by Gaurav Moda, India head – Oil and Gas sector, KPMG in India.