City Gas Distribution: An Overview of Activities in India
City Gas Distribution: An Overview of Activities in India
Natural gas is the third largest contributor in the global energy mix after coal and crude oil and accounts for 24.2% share. Its demand has been growing in India and it is expected to play a crucial role in curbing environment pollution. Given Indian government has ratified the Paris climate agreement, natural gas is likely to play a strategic role in the country’s energy mix. Although its share in the country’s energy mix stands at 6.3%, the country seeks to increase the natural gas share in the energy mix to 15% by 2030. The power, fertiliser and the city gas distribution (CGD) are the major natural gas-consuming sectors in the country. Natural gas is also used as a feedstock in steel manufacturing and petrochemical plants.
India has an inadequate natural gas pipeline network leading to a regional imbalance in gas consumption. The country needs a pan-India natural gas distribution network to ensure last-mile connectivity for the consumers and establish natural gas as the preferred fuel. The Indian downstream regulator, Petroleum and Natural Gas Regulatory Board (PNGRB), has awarded 229 licenses for expanding the CGD network, covering nearly 70% of India’s population and 53% of the area. Additionally, the government has announced the addition of 100 new CGD networks to cover more areas. The sector demand is expected to reach 27 BCM by 2030 due to surge in CNG sales and switch to PNG from LPG. However, achieving the set target would be a challenge if CGD projects face commencement delays. Many CGD projects are not able to keep up with the timelines committed to the PNGRB. The major causes behind the delay are lack of policy and judiciary support, inadequate or absence of gas sources, lack of anchor customers, project financing, local or state-level clearances, and administrative challenges.
Developing a CGD network is a capital-intensive process with a long gestation period. The delay in project commencement or slow growth in natural gas sales volume can impact the financial performance of the company. Given the CGD industry in a nascent stage in India, the companies face a high cost of capital as they have to rely on short-term borrowings at a high-interest rate to fund long-term investments. The government should ensure interest rate guarantees, conduct audits, introduce and implement single-window clearances and create funding agencies to enhance the project financial viability.
The declining domestic natural gas production has forced the CGD companies to rely on imported gas. The natural gas supply contracts are traded in the US dollar but domestic companies pay in local currency that exposes them to currency exchange risks. It becomes important for companies to mitigate this risk by using derivatives or seeking a guarantee for currency mismatch from the government.
The CGD project economics also need to factor in the volatility of the important commodity prices such as steel given the long construction and project execution period. The CGD companies with good liquidity can mitigate the impact of any issues that might adversely impact cash flows in the short term. The company could forecast the cash flows by simulating the influence of inflation, exchange rate, project effectiveness to develop a contingency plan.
The other critical issues causing delay are project management, customer relationship management and health, safety and environment issues. Developing a CGD network is a complex construction as it has multiple branches and exposed to third-party risks. Third-party work by other state and central agencies dismantles the pipeline network and causes supply disruption. This could be addressed creating a body to engage with state and central government agencies to ensure hassle-free construction and improve operational efficiency. CGD companies too can proactively liaison with the government agencies, develop a comprehensive network development plan, and implement effective vendor management to avoid construction delay and mitigate contractor risks.
The low penetration of gas-based equipment and the ancillary industry affects the project schedules and increases import dependence for equipment. Only a few cities have well-developed CGD networks such as Mumbai and the National Capital Region. Therefore, the high switching cost is a major hindrance for CGD companies in switching customers to natural gas across India. The availability of affordable appliances and equipment along with the pricing benefit over substitute fuels is a must for gaining ground in an already competitive market. The filling time for CNG vehicles is high that leads to long queues and waiting time at CNG stations which may impact the consumer conversion rate. The companies could address this issue by increasing the CNG filling station density. However, developing a CNG station involves huge investment and regulatory clearances. The permission to operate mobile CNG stations could be a game-changer for the companies and the government in the long-run. The introduction of value-added services at filling stations such as grocery stores, calling to pick-up vehicles for filling during non-peak hours, etc. could help in increasing customer satisfaction and boost CNG sales.
Moreover, finding skilled labour is a challenge for the CGD industry as the CGD network construction requires welders, plumbers, engineers etc. throughout the project life. Given this CGD industry is not yet completely established, the experienced engineers and technicians do not find it attractive and remunerative. Therefore, the companies and government should collaborate to set up educational centres to develop a workforce with required skill sets.
CGD network development is imperative for the growing Indian economy. The natural gas preferred fuel would enable the government to achieve its target of reducing crude oil imports by 10% and meet greenhouse emission reduction targets.
Mr. Atul Rawat is Assistant Professor, Department of Energy Management, University of Petroleum and Energy Studies, Dehradun.