By Siddharth Bhatnagar
Gas supply was on a high since early 2000 with the demand met by LNG import and in 2009 with the significant increase in domestic production CGD sector looks pretty promising with new entrants of market players. Termed as green and clean energy, demand of natural gas was prioritized by Government to the sectors Power plants, Fertilizers Industries (LPG refineries petrochemicals plants tea plantation steel) CGD in the descending order .Boosted by the supply of natural gas and governments inclination in covering more cities under CGD, many private players entered into the segment but overall the market is still dominated by four major players GSPC, GGCL, IGL and MGL.
After the brief era of positive and fruitful business environment in the sector, what suddenly changed the market conditions? The following key indicators will project the challenges and downfall
- There is drastic drop in the distribution of natural gas in the Kg D6 basin from 64 mmscmd to mere 15 mmscmd .As the government has already prioritized distribution of gas to the major sectors keeping CGD at last, demand to be met by RLNG. Economics behind the CGD model is taking a beating.
- PNGRB act envisages the market player (incumbent or new entrant) to have monopoly of five years and network provision of 25 years from the date of authorization. As it takes minimum of 2 years in laying the network, more time period should be provided to encourage players as the market is mitigated by gas supply.
- Government inclination towards the environmental friendly gas has supportive tax structure which keeps the rate low but VAT deployed by state government spoils the pricing stature .UP, Gujarat are few which have kept the tax slab high .
- As the rupee has gone all time low market players have to rely more on imports of LNG which is taking a heavy beating on the price structure.
- India has currently gas transmission infrastructure of 11900 km which is confined to central, western and north India. All the recent pipelines are in proximity of the older ones leaving pretty few pipelines in southern and eastern parts. As the low availability usage is low coupled with maintenance and corrosion problem.
- There were aggressive bids in the second and third round of round table bids organized by PNGRB which has high probability of weakening their current credit matrix. The decision of spreading geographical presence by key players needs a review as supply of gas has gone eventually down.
- There is a mix set of customer base (Industrial and domestic segment) in the CGD sector. Industrial and large commercial players offer benefits of pricing flexibility, inclination towards the clean power and uninterrupted power generation. Meanwhile CGD players have to take care of price in dealing with domestic segment.
Key Decision Making
As the country faces severe shortage of gas, measures like new pricing in the gas KGD6 basin is a welcome move .New pricing boosts the current gas exploration players and invite foreign players which may result in the increase in the supply of gas. The cap on priority of gas usage in the key sectors again proves the bottle neck to the CGD players. Eventually the price will pass on to the customers will may tweak this decision. Government decision and policy making must be encouraging so that incumbent and new CGD players should feel safe in investing. Priority on the new exploration of gas and international pipelines should be kept in mind by the Government so that the entire related players business does not come under threat.
School of Petroleum Management (sai.siddharthabhatnagar@gmail.com)
References
- http://icra.in/Files/ticker/CGD%20Note_final.pdf
- http://crisil.com/pdf/infra-advisory/4-city-gas-distribution.pdf
- http://en.wikipedia.org/wiki/National_Transmission_System#Gas_distribution_network
- Infraline Report on CGD 2011-2012
- Infraline June 2013 edition