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B.S. Negi, Member (Infrastructure), Petroleum and Natural Gas Regulatory Body (PNGRB)

05 Mar 2011

The downstream oil industry regulator, Petroleum and Natural Gas Regulatory Board (PNGRB) was constituted under The Petroleum and Natural Gas Regulatory Board Act, 2006 with an aim to protect interests of consumers and entities engaged in activities related to petroleum, petroleum products and natural gas. It also has the responsibility to promote competitive markets.

However, there exist reservations within the industry regarding the powers and the authority of PNGRB to authorise City Gas Distribution projects. The case challenging the authority of the regulatory Board is being pursued in the Supreme Court. Infraline Energy's Sangeeta Tanwar in an interview with Negi finds out the implications of the on-going ambiguity concerning regulatory body's authority and role and the future roadmap of the downstream industry.

In the interview, Negi argues for arriving at a common tariff structure for CGD bidding. At the same time, he shares voluntary industry initiatives such as T4S and ERDMP (Emergency Response and Disaster Management Programme) being pursued by the Board for promoting CGD. Negi also encourages industry stakeholders to come forward for transparent discussion with the Board on various issues concerning midstream and downstream oil and gas industries.

Edited Excerpts

What is PNGRB's view on the issues related to the Board's authority to approve CGD projects?
In respect to authorisation of CGD projects the Board's views has been clarified by it in the Hon'ble Supreme Court and in accordance with the same submission the Board has authorised the entities under the first round of bidding.
Now that the case is in the Supreme Court. What are PNGRB's arguments to settle the issue?
The Government has now notified Section-16 effective from 15th July, 2010 and therefore, the government or any other body has no objection for PNGRB issuing authorisation in respect of CGD projects as well as pipeline projects.
What all projects have been pending owing to the debate over Board's authority?

Authorisation power of the Board is applicable to CGD projects and pipeline projects. In the areas of CGD projects, the cases pending for authorisation under Regulation-18 (that means the entities which have been laying, building, operating CGD projects prior to the notification of the PNGRB Act) pertains to five entities and about 16 GAs. Under Regulation-4 (i.e. entities awaiting authorisation under processing of bidding undertaking by the Board) 6 GAs are under bidding in the second round of bidding. In the pipeline segment, the authorisation waiting are for three new pipelines for which the bidding process has already been concluded. These are Mallavaram-Bhopal-Vijaipur, Mehsana-Bhatinda, Bhatinda-Jammu-Srinagar pipeline. In addition, there are other pipeline projects waiting authorisation under regulation-18 concerning few entities for two pipeline network. Thus about 21 cases of authorisation are pending.

"T4S ensures expenditure on safety on equal footing by all the bidders. It makes sure that when bidders bid for a tariff they know what has to be done and the kind mount that they need to spend on safety."

We feel that there should not be any further delay in awarding the contracts simply because implementation of these sanctioned projects is taking some time. The deadline for completion of projects will be counted from the day a project has been authorised as against the day of closure of the contract. For pending projects contracts have been awarded and other related formalities have been completed. As and when the LoI (letter of intent) is issued for these projects it's going to trigger the actual work on these projects. The more the delay in issuing LoIs, the more would be the delay in the implementation, thereby, adversely affecting the time-bound industrial growth and development.

What are some of the key industry-issues that PNGRB feels need to be addressed to promote CGD?

India has experience of eighteen years of implementing CGD. By now the issues working as retarders as well as promoters of CGD movement are well recognised. I would, therefore, suggest the key issues which will accelerate the growth of CGD in India:-

1.The priority of allocation of gas especially in the current context when the government has taken on itself the allocation of gas from domestic fields. The natural gas in CGD sector replaces high end fuels which are also very dearer such as Petrol, Diesel, LPG, Naphtha, which involves lot of foreign exchange outgo. As of now India imports crude oil equivalent to more than 80 per cent of its petroleum products requirement. In addition, CGD has environment friendly applications of natural gas energy resources.

2.Another important issue relates to tariff structure and gas transportation. There is a big debate whether we should have postal stamp tariff or UK based stamp tariff. The decision in favour of one tariff system or the other should be taken keeping in mind that the ultimate beneficiary has to be the consumer and the decision should aid the industry growth.

3.The local administration need to support CGD entities making land available for CNG retailing.

4.OMCs also need to consider establishment of CNG retailing in their existing ROs to enable the user to get the gas filling at a convenient location.

5.The CGD entity needs to look CGD business as a social responsibility rather than a pure commercial business. The turnover profit margin versus the turnover as reported by various CGD companies is quite high. Instead the companies should pass on the benefit to the consumer in all CGD business segment such as Domestic Consumers, CNG consumers, Commercial Consumers and Industrial Consumers.

6.To encourage application in transport sector which is a major business segment for CGD, it is essential that CNG is made available along highways. For this purpose the Board has taken initiative to cover the major cities, districts so that when authorised, the CNG is available to vehicle users on a continuous basis along the route. To achieve such a growth in India we need to have faster growth of the pipeline infrastructure. The Board has also taken initiative so that the entities could be authorised to establish CNG stations along highways which could be fed through pipelines connecting highways or daughter booster system or through LNG by tanker system.

7.Another issue would be to reduce the waiting time for vehicles to fill CNG. This could be done by establishing more stations. However, there are limitations for having new outlets within well developed cities so there could be two fold solution i.e. to open RO for CNG in periphery of the town where land is available and to convert existing ROs in multilevel filling i.e. another filling station above the existing filling station. This issue is being taken by up the PNGRB with the concerned authorities specially with PESO (Petroleum and Explosives Safety Organisation.

8.The Fiscal regime in various states needs to be smoothened to encourage CGD projects. The Sales Tax rate varies from 0 to 26 per cent from state to state. This is not only discouraging the free flow of the consumer to take the gas from adjoining states but also creating bottleneck for gas swapping, gas trading.

9.The gas consumers in India has been stagnated at 8 per cent for long time and its has just reached 10 per cent after the D-6 gas from offshore Kakinada has reached the market as against 24 per cent global average. Therefore, to encourage the use of gas the Government can provide tax holidays for CGD projects for a limited period of 5-7 years.

Are there any suggestions how we can go about creating industry and consumer friendly policies?

I will answer this by taking up the case of oil sector as an ideal example how sensitive markets should be handled.

I believe that the oil sector was opened up for competition at the right time and the move aided the growth of the sector. The oil sector was fairly mature when it was opened up welcoming competition. However, this has not been the case with gas sector. Personally, I will say gas sector was only one-third mature when the competition was allowed. The ideal way to go about opening the sector would have been to target a 24 per cent share of gas in the energy basket. In our case when the sector was exposed to competition gas' share in the energy basket was only 8 per cent which has now increased to 10 per cent. Deregulating the gas sector at a time when the market was not mature was akin to committing suicide.

"Criss-crossing of pipelines will foster competition which will lead to competitive tariffs, ultimately benefiting consumers."

Nowhere else in global history have we ever seen any government opening its door to competition prior to a sector attaining some level of maturity. Ideally, one should first develop the market first before paving the way for competition.

What are the lessons to be drawn from our experiences in gas sector?

Opening up of a sector implies increased competition. However, prior to opening up the gas sector had adequate infrastructure been built by PSUs it would have paved way for easy access to competition. In any market, instead of authorisation one should go by access code. If the infrastructure is in place, it is far easier to regulate a market. In the absence of adequate infrastructure, as turned out to be the case with gas sector owing to competition, there are now multiple players. And since the tariff is now decided through bidding process there are multiple bids and varying tariff. Now the question is how to assimilate and bring on par resultant multiple bids and varying tariff. For this we need to have a national gas management system that would result in countrywide uniformity.

Gas sector is a valuable energy sector and it is growing but at a slower pace. The India's share of gas in its energy basket as of now is 10 per cent which is expected to reach at least 16 per cent within the next five years as compared to global average of 24 per cent.

The only suggestion which could be made is to allow market forces to operate for gas consumption and gas pricing. This could cover both domestic production as well as import of gas.

Safety for CGD has been a priority with PNGRB. What's the latest on this front?
The safety in CGD sector is of great importance for us because it concerns public at large. In fact, there is hardly any secluded installation of CGD entities which does not affect the public. The Board has acknowledged this issue through a regulation viz. Technical Standards and Specification including Safety Standards (T4S) which has been notified for CGD.
"Another important issue relates to tariff structure and gas transportation. There is a big debate whether we should have postal stamp tariff or UK based stamp tariff."
In addition, Code of Practice for Emergency Response and Disaster Management Programme (ERDMP) has also been notified which elaborates the process, the preparedness, implementation of safety related requirement. The Board has associated National Disaster Management Authority (NDMA) in this process so that a common practice is available to implement across the country. The Board is also monitoring the issue related to safety of CGD through reporting by entities and periodic 3rd party safety conformity reports.
What is the unique feature of T4S?
T4S Regulation is the short form of the Technical Standards and Specification including Safety Standards which are available for:- 1. Pipelines 2. CGD Projects T4S ensures expenditure on safety on equal footing by all the bidders. It makes sure that when bidders bid for a tariff they know what has to be done and the kind of amount that they need to spend on safety. This does away with the ambiguity safety spends taking care of safety measures. It does away with the disparity between a bidder committed to spend say a million on ensuring safety and the other willing to put aside only half a million. This move aims to put check and balances for players who feel safety is best left to government. The T4S Regulation covers the safety at design stage, construction stage, commissioning stage, operation stage. They also address the incident reporting, investigation and lessons learnt from past incident and accident. T4S Regulations are in consonance with ERDMP for managing the onsite and offsite emergencies. The idea behind all these voluntary initiatives is not to impose regulations but to create a uniform document for implementation of CGD across the country.
How has been the response to PNGRB's suggested move to give gas pipeline operators freedom to compete in overlapping areas? How many players have come forward with their comments and when can we expect a notification to this effect?

When the pipelines authorised by the government or new pipelines being authorised by the Board are implemented, the specific area will find gas supply from more than one network. Country has limited area which is not going to increase. With CGD expansion, pipelines are bound to criss-cross.

For example let's take a Greenfield example. There is this East-West pipeline from Kakinada in Andhra Pradesh to Gujarat. Now, another pipeline from Mallavaram to Bhilwara is set to cross it. It turns out to be a common catchment area for serving consumers with the third pipeline being Surat to Paradip. And, incidentally this common catchment area will offer consumers different tariffs. The East-West is a government authorised pipeline and therefore the Government has decided the tariff for this pipeline. Mallavaram to Bhilwara has tariff suggested by the bidder since the pipeline was up for bidding. On the other hand Surat-Paradip is a yet to be bid pipeline, so for this new tariff will be coming up.

The customers in and around a catchment area with the common approach of multiple pipelines will have the freedom and option to avail gas from a pipeline of their choice. Criss-crossing of pipelines will foster competition which will lead to competitive tariffs, ultimately benefitting consumers.

This is a good sign both with respect of supply security and competition. Although pipelines are not created primarily for the purpose of competition because once laid they constitute in natural monopoly but access to a particular industry or CGD could be from more than one pipeline system in a mature market which would be best for the consumers and this has been the practice in developed and mature gas markets like United States and United Kingdom.

At the same time there is a way out to address this situation as well. For example the tariff fixed by the government and the one set by bidding process are both ceiling tariffs. So, if this tariff is falling in x players' domain, then that player can very well come forward and suggest fresh tariff thereby encouraging competition.

State owned-oil marketing companies are also fighting PNGRB over its powers to regulate prices for non-notified petroleum products -- transportation fuels like motor spirit and high-speed diesel. Where is this battle headed?
The fixation of price is not within the scope of PNGRB Act and also none of the petroleum products has so far been notified.

(InfralineEnergy thanks B.S. Negi, Member (Infrastructure) Petroleum and Natural Gas Regulatory Board for sharing his valuable insights with our readers. The column 'In Conversation', is a platform to engage experts from various sectors to share their views on the different transformations happening in the Indian energy sector.)