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Challenges of City Gas Distribution, Shri R V Shahi, Former Secretary, Ministry Of Power

Challenges of City Gas Distribution
[R V Shahi's Weekly Column for Infraline, February 4, 2008]

Gas distribution in Indian cities through pipeline network is relatively a new concept. Even 10 years ago, cities like Delhi and Mumbai did not have, for consumers, the piped gas supply system. Compressed Natural Gas (CNG) for transportation is even more recent. In whichever towns/cities the piped gas supply for consumers and CNG for transportation (for example in Delhi) has been brought into use, there is a dramatic effect not only on convenience to consumers but also it has brought about a significant positive impact on environment (less air pollution). Recently, the first Euro Asian Conference Cum Exhibition was organised at Delhi by National Engineering and General Industries India, Energy Management International, U.K., and Organisation Dynamics India. I participated partly in this conference and chaired one of the key sessions dealing with Investment Opportunities in City Gas Projects. A number of important issues emerged. I outline below the substance of the opening remarks I made :

  • Since the beginning of 1990's, when the 21st Century was yet to arrive, most of the energy professionals were of the view that if the 20th Century was of coal and subsequently of oil, the 21st Century would be dominated by the most important energy resource i.e. gas. A number of projections were made. But somehow, in spite of gas being an environment friendly fuel, it has not been able to occupy the space that we were all looking forward to. For example, in power generation, even though almost 45% of gas available in India is allocated to power, we are hardly about 7% of the total installed capacity based on gas. Therefore, gas being the fuel of 21st Century is not only illusory but, at least in India, we are all waiting for it like a mirage in desert. Perhaps after the KG Basin gas comes the situation may change.

  • Overall availability of gas has obviously constrained the process of large scale shift in transportation from liquid fuel to compressed natural gas. Under the direction of the Supreme Court, and with highly positive impact on pollution, a substantial amount of road transportation in Delhi has shifted to CNG, but a lot more remains to be done in Delhi and more so in other towns and cities.

  • As regards domestic piped gas supply, in the whole country hardly 8 lac homes have been provided. Even in Delhi the level of penetration is hardly 3%. The rate of growth, in terms of coverage, in a period of last 8 to 10 years is not something which we energy professionals in general and those energy professionals, who are engaged in city gas distribution in particular, can be proud of. It has really been very slow.

  • As a customer of piped gas supply for almost 5 years in Bapa Nagar (the Government Colony for Govt. of India Secretaries and other Senior Officers), I can authentically say that as a service provider for the existing customers, the city gas company could legitimately claim to be ranked in excellent category. However, as one wanting to be a customer from an important locality close to All India Institute of Medical Sciences, I am rather reluctant to rate the gas distribution company even as Average for the reason that the company's response to enlarge the coverage and provide the service to more customers is somewhat indifferent. This brings out, at a conceptual plane, our inability to service both existing and prospective customers in a professional manner.

  • One of the reasons of the slow pace of enlarging the city gas distribution network, in cities where it exists, and taking up new cities has no doubt been the lack of availability of sufficient amount of gas. We are well aware that as it is, it has not been possible for the power sector to embark upon large expansions through gas based power generation capacities. In fact, almost one third of the capacity based on gas (and that works out to over 4,000 MW) remains unused for want of gas. The overall utilisation of gas based power plant capacity in the country is less than 70%, whereas coal based plants run at more than 80%, and gas plants, if gas was available, could run at more than 90%.

  • Historically power and fertiliser, two important inputs for industry and agriculture, have occupied the largest share (almost 85%) of the total supply of gas. In spite of this, the shortage has caused under utilisation of capacities.

  • We are also aware that both these sectors continue to put forward their arguments for even higher allocations. The argument of the power sector has been that it is a prime mover of every segment of economy and therefore has the potential of large scale multiplier effect on economy. Similarly good agricultural output is essential for food security of the country. Therefore, the constraint of the city gas distributor, though valid from the point of view of lack of availability, and the whole issue need to be dispassionately examined and appreciated keeping in view entirety of the situation and intersectoral requirements.

  • The average price at which the natural gas is supplied by Gas Authority of India Ltd. is about 3 dollars per million BTU (based on the Administered Price Mechanism). When the domestic gas is delivered to consumers, it is around 6 dollars per million BTU. This is on account of the additionality of costs that get added, which include the cost of infrastructure of distribution, its maintenance, overheads and profit margin of the gas distribution company. Obviously, when the whole issue of pricing is examined by the Petroleum Regulatory Board the true picture will emerge.

  • One of the ways to supplement the gas, which is supplied through domestic production, is through import of Liquefied Natural Gas (LNG) and that could have provided opportunities for expanding in a significant way the customer base in the existing towns and in also covering new towns. But, unfortunately due to the erratic price behaviour of LNG it has not been possible. I recall, in the beginning of 10th Plan (2002) there was an ambitious programme for setting up a chain of LNG terminals both on Eastern and Western coasts, with the idea that liquefied gas would be imported, regasified at these terminals and then the gas after regasification will be supplied though network of pipelines. One does not know why and how the gas suppliers have linked the movement of gas price with that of crude. In a period of 10 years the crude price has moved up almost 10 times from about 10 dollars a barrel to 100 dollars a barrel. It appears that the CIF price of LNG at terminal, at present could be as high as 8 to 9 dollars per million BTU and therefore after adding the cost of regasification and transportation etc. the delivered price to bulk buyers will be almost 10 dollars per million BTU. With this type of a price level, and more importantly highly unpredictable and erratic price behaviour, any long term planning of city gas distribution get severely constrained.

  • The whole country hoped that when the Petroleum Regulatory Bill becomes an Act, the statutory authority viz. the Petroleum Regulatory Board will try to balance the interests of all the stakeholders including customers and therefore will determine price with such an approach. We do have Petroleum Regulatory Act now. We also have Petroleum Regulatory Board. What we do not, however, have is the Board empowered to do anything with upstream gas. If upstream gas price is not regulated, there is very little that the Regulatory Board can do to safeguard the interests of consumers in so far as the price of gas for them is concerned.

There were three presentations in this session - by Director Crisil, Senior Representative from Adani Energy, Director, Earnst and Young and Executive Director MECON. The main points of these presentations, all of which together bring out various aspects and issues concerning city gas distribution, are summarised below :

  • In India at present we have city gas distribution in very limited places which include Delhi, Ahmedabad, Baroda, Mumbai, Mangalore and Bangalore. A number of new projects have been identified for other locations and they are under implementation. These include Faridabad, Agra, Lucknow, Kota, Cochin, Tripura and Calcutta. Even if we consider the projects in hand which will be implemented during next few years, the coverage is likely to be rather limited.

  • There are a number of benefits from the increased usage of natural gas through city gas distribution networks. These include its impact by way of bringing down the oil intensity of gross domestic product, which would help the country in withstanding the impacts of oil price in a more resilient fashion, reducing the crude import bill of the country resulting in substantial savings in foreign exchange which can be diverted to be used for development of infrastructure, replacement of LPG by natural gas would reduce the LPG subsidy burden on the Government and the possibility of distributed power generation along the gas pipeline network leading to more reliable power supply. Finally the natural gas usage in an extensive manner will have a substantial positive effect on pollution control.

  • In general, the experiences indicate that city gas distribution business is an attractive investment. For the year 2006 Gujarat gas had a revenue of around Rs. 970 crores and a profit of about Rs. 88 crores. Their return on capital employed was approximately 22%. The Indraprastha Gas, which operates the system in Delhi, had even better financial results - Rs. 521 crores of revenue, Rs. 106 crores of profit and 41% of return on capital employed. These encouraging results are clear indications of the attractiveness of the opportunity and therefore the preference of the potential investors. Perhaps, the only constraint seems to be the shortage of gas supply.

  • A typical gas distribution network would cost around Rs. 350 to 400 crores to handle a volume of the order of 1.5 million standard cubic meters. The build-up of the consumer base and therefore off-take is normally low and even in a period of 9 to 10 years the reasonable level of customer penetration is not more than 50 - 60%. (in case of Delhi and Mumbai, in spite of about 10 years of operation the customer penetration is in the range of 3 to 4%).

  • Long gestation together with low volume creates an adverse impact on the business and therefore it requires a good degree of patience.

  • The issues which can impact development of the City Gas Projects are as follows:

  1. Since there is considerable amount of uncertainty about the availability of gas, normally the management decisions on capital expenditure for creating or augmenting the distribution infrastructure gets delayed.

  2. There are uncertainties about demand linked to uncertainties about the gas supply. Equipment manufacturers are not able to project the demand for such equipment which would require gas as the fuel and therefore their restricted availability leads to further less demand of gas by consumers.

  3. Inadequate availability of skilled manpower vis-?-vis the increasing demand is emerging as a serious constraint.

  4. Permissions and clearances from the authorities invariably get delayed.

  • There are a number of regulatory issues which come in the way of decision for going ahead with the project. Some of these issues are as follows:

  1. Will the financial viability govern award of licence?

  2. What would do the basis on which the licence area would be determined?

  3. Will the commodity margins be disallowed?

  4. What would be the period of exclusivity during which no other player will be allowed?

  5. What would be the returns on the investment that are made for development of infrastructure?

  • A paper presented by MECON brought out a case study of implementation of CNG in Delhi for transport. And, in that context, it highlighted the problems and challenges for creating the infrastructure network in an existing city and particularly through areas which are thickly populated. Right-of-way problems become highly challenging to resolve and to proceed with the project.

  • While highlighting the CNG experience of Delhi, this presentation also brought out an interesting comparison between what has been achieved here in India and in Pakistan. India started this initiative in early 90's while Pakistan commenced its activities in mid 80's. So far, number of vehicles which use CNG in India is approximately 4 lacs while in Pakistan the corresponding number is 15.5 lacs. In India hardly 2.3% of vehicles use CNG while in Pakistan 25% of vehicles are on CNG. The reason for this large difference is because of the fact that Pakistan has been able to set-up and commission more than 1700 CNG stations while in India we have only 350 such stations.

  • The paper also highlighted the key factors which have contributed to the success story of Pakistan. These are:

  1. The Government policy and directive for conversion of all official vehicles to CNG.

  2. Active CNG Associations which facilitate NOC's and licences.

  3. Exemption or reduction of import duty and sales tax on import of CNG refuelling and conversion equipment.

  4. Incentive for replacement of Diesel with CNG.

  5. Encouraging importers to set-up indigenous manufacturing facilities for CNG equipment.

  6. Granting licences for setting-up compressor facilities.

  • Since the progress in Pakistan on this front has been significantly better than we have been able to achieve in India, it would be relevant to study the various initiatives put in place by them for an appropriate adaptation in our own country.

  • One of the papers presented emphasised the need for single switch energy usage which could include cooking, lighting, drying, feed stock, space cooling, steam, power and heating. Such an integration may be energy efficient but there are a number of interlinked issues which will have to be resolved.

  • One of the reasons that different forms of energy uses is not getting integrated is lack of availability of latest equipment which could use gas as the fuel and be more energy and environment efficient. Engines used in our transport system are not the only examples. Conversion of liquid fuel using engines in transport to engines which can use CNG comes with a cost. But on the ground of energy efficiency and more importantly in the interest of pollution control, the regulatory mechanism guides and directs such switch over. To what extent similar switching is possible in cases of other equipments and gadgets needs considerable amount of study and analysis.

  • The cost of the new technology also stands in the way of shift in usage pattern. Unless using the economies of the scale principle the number of such equipments and gadgets is increased, the required cost effective level will not be achieved.

  • In conclusion, some of the issues which will require more comprehensive examination to understand the challenges and issues involved in city gas distribution are as follows:

  1. Allocation of natural gas for different segments of activities is crucial. Power sector advocates for increasing the present level of consumption on the ground of its multiplier effect on economy. Fertiliser brings out the strengths of its own argument. Other industries which also need energy explain their own prospectives. The desirability of substantial enlargement in the level of customer penetration on piped gas supply particularly to domestic consumers, small and medium enterprises and commercial establishments is an important consideration. Mere qualitative presentations and statements may not lead us to authentic and reliable conclusions. The issue requires a thorough quantitative analysis. The objective has to be the energy efficiency. Substitution of usage pattern leading to more efficient use of gas on the one hand, and implication of substitution when comprehensively and quantitatively analysed on the other, may lead us to a synthesisation of all the concerned issues and therefore may lead us to a reliable conclusion.

  2. The present regulatory framework in the gas sector is totally inadequate. Petroleum Regulatory Board, unless it is empowered to cover both upstream and downstream gas, cannot be in a position to evolve and implement a holistic approach. If upstream gas is left to market forces, the present market being totally imperfect in view of serious mismatches between demand and supply and hardly any trace of competition, there would be a totally arbitrary price for upstream gas and regulation at downstream will lose its meaning in view of a given price of upstream gas. Petroleum Regulatory Board must have enlarged function, responsibility and commensurate authority.

  3. There is always a paradox of infrastructure first or demand first. Infrastructure developers quite often become victim of an inadequate demand syndrome. They feel that if they invest, the infrastructure is not fully utilised in the short term and therefore is not able to yield the acceptable return. And, therefore they need to wait till such a neutral point (or end point) is reached. They fail to recognise a basic fundamental that in case of infrastructure, in fact its availability leads to more demand. On balance therefore it is highly recommended that projecting the future (and not the present demand), the development of infrastructure must be taken up rather than waiting for achievement of a level of demands which can justify the investment. There are any number of examples when initiatives were taken keeping this principle in mind, initially the infrastructure remained comparatively under-utilised but soon their utilisation became so high that not only the short falls of the past were made up but continuing increase in demands yielded good financial results, and in fact, the infrastructure required further expansions. This principle will continue to hold good, in Indian context, for several years till we reach reasonably good levels of infrastructure in power, transport, ports, highways, railways, airports etc. They all need massive expansions and developers are bound to benefit in the medium and long terms, even though, in the short term, some of them may remain somewhat under-utilised in initial years.

Copyright : R.V. SHAHI