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Rajeev Sharma, CEO (Gas Business), Adani Energy Limited (AEL)

21 Oct 2011

Adani Gas, formerly known as Adani Energy Limited, was founded in 2001 for setting-up of distribution network in various cities to supply natural gas to industrial, commercial, domestic and compressed natural gas (CNG) customers. Adani Gas is present in Gujarat operating in Ahmedabad and Vadodara and it is also running CGD business in Faridabad, Haryana.

Adani Gas has become an example of sorts by successfully running a large portion of its city gas distribution (CGD) business based on Regassified Liquefied Natural Gas (R-LNG) in Gujarat. The company is all set to roll out CGD infrastructure in places such as Noida, Lucknow, Khurja, Udaipur and Jaipur. The company's expansion and foray in new cities is being led by its CEO, Rajeev Sharma, who joined the company nearly eight years back. Sharma has over 35 years of experience in oil and gas industry spread across GAIL India and Indraprastha Gas Limited (IGL).

In an interaction with InfralineEnergy's Sangeeta Tanwar, Sharma speaks about non-availability of gas being the biggest challenge in growth of CGD and the changes required in existing bidding process. Sharma shares his insights on huge investments required to set-up CGD infrastructure. Sharma reiterates that concepts like multi-city players and marketing-exclusivity would have no real meaning in a scenario where CGD is still developing.

Edited excerpts.

Relying solely on R-LNG in Gujarat, Adani Gas has created a successful business model running on R-LNG. We understand that running CGD on R-LNG is expensive. How did you overcome pricing challenges? Do you think that one can develop a successful and sustainable CGD model based on R-LNG? What are the critical success factors for the same?
For our Ahmedabad project, we have been getting gas only from Gujarat State Petroleum Corporation (GSPC). We buy LNG on spot as well as term basis. It's purely our operational tightness and the efficient systems that we have arrived at over a couple of years that has kept us going. The fact is that if we get access to APM gas like other CGD companies in the country, we could sell cheapest gas in the country. Today, our CNG price in Faridabad is almost the cheapest in the country as it is based on APM gas.
Going forward, with scarcity of domestic gas - is it possible for other companies to replicate Adani Gas' successful business model of running CGD on R-LNG in other parts of the country as well?

Availability of domestic gas is going to go down unless there are new finds. Discovery of new fields and gradual decline in production from existing fields is an on-going process. I would not say that gas is scarce but it is scarce at a particular cost. However, the truth is that domestic gas, as per records available today, is going down. Though the new finds will come-up in due course of time, but the fact remains that our requirements of gas is much more than the new domestic finds expected to come-up.

Thus, there has to be more and more dependency on LNG. And, it is not something new; Japan has been living on LNG for many years and so has been Korea. Worldwide many countries, which do not have natural resources depend on imports.

In Korea, a single company imports all the gas required by various players. Can India also follow this model to meet its increasing demand for gas?

Every country has its own peculiarities because everything has got advantages and disadvantages. Now, the fact remains that India is creating an open market, where people can go out and get gas, which, means more and more gas can come in the country.

However, what happens on the filp side is that if a seller knows that he is the only seller and three people are going to come to him to buy gas, the seller will charge them differently. But the case would be reverse if all of us come together and go to the seller as one identity. The seller would then have no option but to charge reasonable price for the same gas.

"In view of the increasing cost of input gas, operating expenses and regulatory compliance costs, a stage will come where the selling price of CNG would be higher than Diesel/Petrol prices which would discourage conversion to CNG."

And the major difference between India and a country like Korea is that providing energy in Korea is an obligation. In Korea, if you do not supply energy you are held liable and have to pay certain penalty. As far as Japan is concerned, the country does not have one single buyer, every player out there imports gas individually.

What are the advantages and disadvantages of CGD companies in either choosing to construct their own CNG stations or utilising the existing infrastructure such as petrol pumps put in place by existing players?

It's a purely commercial decision depending upon say a factor such as at what cost I am getting the land. Currently, we have to pay usage charges to the oil companies. Now, had our land cost been cheaper, we would not have been paying money to oil companies. But then again availability of land is a big concern. There are times when we want to have our own land for building CNG stations, but it's not available.

Most of the cities in Gujarat are developed, which means that the major oil companies have already set-up stations at crucial locations. Well, you can't create retail outlets outside the city, it has to be within the city. Given non-availability of land in prime locations, we still try and hunt for strategic locations wherever possible for establishing our own infrastructure.

What are the challenges faced by you in operating and expanding your network of CNG stations in a city to meet increasing demand of CNG?

The CNG business is such where demand is to be assessed a year before. Even if you leave aside availability-possession of land, the crucial factor in setting-up a CNG station is that you require essential equipments such as dispenser and compressor. Now, compressor alone has the largest delivery time. Even after putting-up all these facilities, commissioning of a CNG station takes a year. As far as demand is considered, sometimes you are extra and sometimes you are short.

In view of the increasing cost of input gas, operating expenses and regulatory compliance costs, a stage will come where the selling price of CNG would be higher than Diesel/Petrol prices which would discourage conversion to CNG. In some cities, the price of CNG is already closed to that of diesel.

As compared to other companies in Gujarat, Adani is selling PNG at a premium price in Ahmedabad. Why a customer would move from liquefied petroleum gas (LPG) to PNG? How do you demonstrate sufficient value to the customer to make a switch? What is the business strategy at work behind this move? Would not higher PNG prices have a bearing on number of connections achieved by you?

We have no choice but to sell CNG at higher prices simply because if we are buying gas at Rs 24, then it cannot be sold at Rs 22. We are buying expensive and therefore, selling expensive. If we get cheap gas at APM prices, we have no issues in selling it cheaper. We are demonstrating that in Faridabad where our prices are lowest in NCR despite higher cost of gas than Delhi. Again, Faridabad has a VAT of five percent, which is not the case in Delhi. Still, we are cheaper.

"Taking year-on-year average, we have been registering growth of over 25 percent over a period of time from the day we started our operations in Gujarat. Adani Gas' growth is organic and not inorganic."

I will also like to draw an analogy here. We all had cable connection for TV, so, why did we switch to DTH? The answer to that is that a premium quality service, will cost you more. Unfortunately, we are comparing CGD with subsidised LPG service. Instead of pricing PNG services at competitive rates, we are rather being told to price it even cheaper than the subsidised LPG. This is being expected despite the fact that we are not being offered any subsidy on our end product. For long, the government has been talking about increasing price of LPG to Rs 700 even if this becomes a reality, gas prices will take long to come up to this level.

We are selling gas in Ahmedabad at market price. We are buying R-LNG and selling the same to our customers. We are able to command a premium owing to our quality service. Adani Gas' total network is controlled by a control room on supervisory control and data acquisition system (SCADA). Also, we offer customers hassle-free paying options. A customer can take a snap of the meter reading with his mobile phone and share it with us for billing.

In comparison with the other two companies in Gujarat namely Gujarat GSPC and Gujarat Gas Company Limited (GGCL), Adani Gas's growth has been largely flat. Its volumes have remained low (around 0.8 MMSCMD). What are the reasons responsible for the low growth in gas volume for the company? What are the steps being taken to address the issue?

We are present only in two cities in Gujarat. In five years, in one city, we have reached a figure of one million cubic metre per day. In no other city, has any other player achieved similar figures in such a short span of time. They have expanded owing to their presence in multiple cities. Going by examples, GSPC is today present in 18 to 20 cities, other player such as GGCL has been in three cities for the past 20 years.

Taking year-on-year average, we have been registering growth of over 25 percent over a period of time from the day we started our operations in Gujarat. Adani Gas' growth is organic and not inorganic. Faridabad is an example of our organic growth, where in one year, we have touched a volume of 175,000 SCMD, while many companies in five years have not crossed even 100,000 SCMD. In Faridabad we will close this year, with volume of over 250,000 SCMD.

Any obstruction in supply of gas to domestic households can lead to a lot of unrest in the life of customers. What is Adani Gas's back up strategy to tackle such a situation? Has, there been any such incident in the past, if yes, what were the strategies adopted by Adani gas to tackle the situation?

In case of disruptions in supply itself, we have set the priorities in terms of discontinuation of supplies to various customer segments. In case of any eventuality, the first segment to be disconnected is industries, followed by commercial and the last segment to be disconnected is domestic consumers.

"Consider this, we judge a demand in a place and accordingly create a business and financial model and work towards it. Now, the demand is the same but the number of service providers has increased. Suddenly, a player sees a demand and creates infrastructure and the end result is that our business model goes for a toss."

I reckon enough reservoirs are created to take care of supplies for at least 15 days in case of any disruptions in supply. At the same time, we can protect our pipeline from accidental damages, but it is very difficult to prevent damage caused by human error or careless digging. In order to distinguish and protect our pipelines, we put clear marker about 1.5 feet above the ground. So, if somebody accidentally digs up the pipeline, it takes that much time to repair it.

In May this year, the supplies to industrial consumers were stopped for an indefinite period due to unavailability of R-LNG. How do you plan to mitigate such interruptions in future?

We are not in the field of producing gas. We are buying gas from some other agency and if that agency is unable to supply due to force majeure, we cannot mitigate that scenario. But then such occurrences are not indefinite but happen only for a short period of time. For example, last year owing to inclement weather ships could not berth at Dahej, which resulted in disruption in gas supply.

With more and more LNG terminals coming-up, more and more grids are being laid for transportation of gas and all these factors will contribute to mitigating such risks.

Adani Gas recently had its CGD licenses cancelled in Jaipur and Udaipur. The company's relationship with Petroleum and Natural Gas Regulatory Board (PNGRB) can be described difficult at best. Even GSPC Gas had to suffer similar fate in case of cities like Halol and Khambat in Gujarat. What is your response to these developments and in future how do you plan to ensure that such developments can be averted?

The Board never issued us a license, so cancellation was not the issue. We have applied to the Board under Section 18 (1) of the PNGRB Act because at the time Section 16 was not notified. Post July, when Section 16 got notified and since this particular act was done prior to the notified act, we are deemed authorised. We have again written to the Board urging them to consider us deemed authorised there.

Under Section 18 (1), certain percentage of the work was to be done by us and the Board says that we have not done those percentages of work. Now, Section 16 has been notified and it says that prior to the appointed date, if anybody has done anything, it has to be deemed authorised.

What are your plans for sourcing gas for Udaipur and Jaipur?

We have planned these cities only on liquids that would be carried to these cities and re-gassified there. We will be bringing liquid from Petronet LNG on tankers and re-gassify them. With more and more transmission lines being laid, Jaipur and Udaipur would get pipeline connectivity.

Adani Gas has recently protested against the Hindustan Petroleum Corporation's (HPCL) expansion plans in Ahmedabad. What are the issues that you have raised with PNGRB and what has been the Board's response?

HPCL earlier had ten stations - one mother station and nine daughter stations, and thereafter, they were given permission to set-up another six daughter stations by Government of Gujarat. Board while considering our authorisation for Ahmedabad had taken no objection certificate (NOC) from us for these 15 stations.

"As regards to gas to be imported for Mundra Port project, it will have a mix of spot and long-term LNG. We are also open to people booking capacity with us. Exact modeling of the business is being worked out."

However, we understand that Board is considering request from HPCL to expand. This is being done without any discussions with us and without any public consultation process. Moreover, while our authorisation is still pending with the Board since four years and HPCL's expansion was being considered.

Consider this, we judge a demand in a place and accordingly create a business and financial model and work towards it. Now, the demand is the same but the number of service providers has increased. Suddenly, a player sees a demand and creates infrastructure and the end result is that our business model goes for a toss.

Moreover, it's an unequal play because their gas sources are not same as ours. We are purely protesting from regulatory point of view.

How close is Adani Gas in acquiring a stake in Green Gas Ltd? How would your move to acquire 20 percent equity in Green Gas Ltd going to complement the company's existing business?

In Lucknow, we laid our network in 2005 after getting no NOC from Uttar Pradesh government. All this time we have been requesting GAIL to give us connectivity. Our network was ready earlier than Green Gas's. GAIL's own joint venture with Indian Oil Corporation Limited (IOCL) started later, but got connectivity ahead of us.

Now, we have applied to Board under Section 18 and even under Section 16 to get the required authorisation. With two set of infrastructure in place, conflict of interest is bound to occur.

In the given scenario, we suggested to the promoters of Green Gas, namely GAIL and IOCL to work together. We have signed a Memorandum of Understanding (MOU) where in we would merge our assets with Green Gas and in lieu of the same, we would be offered about 20 percent equity of Green Gas. The entire infrastructure (Green Gas and Adani's) will get integrated and we will be working as one single entity.

"You may decide to go at 14 percent internal rate of return (IRR) or one may work in a city at Re 1 IRR for strategic reasons. May be one city is not paying back but ten cities together are. It's a portfolio and call of the company as to for what benefits and reasons what pricing is to be done."

We have agreed to a third party valuation and based on the assessment and valuation numbers, both parties will take a call. The whole process will take another seven to eight months.

What would be the impact of Adani's foray into natural gas import business with plans to build an LNG terminal at Mundra port impacting the gas availability to Adani Gas for its CGD operations? What is the latest status on Mundra Port project?
We have received communication from the Government of Gujarat that the shareholders agreement has been agreed to. As regards to gas to be imported, it will have a mix of spot and long-term LNG. We are also open to people booking capacity with us. Exact modeling of the business is being worked out. Again, procurement of LNG requires access to LNG terminal because re-gassification capacity is limited. Now, when we are getting our own terminal in Mundra, then sourcing of gas is not going to be a problem. Also, we are very much interested in expanding our own CGD network, for which we will also be requiring gas. At the same time, we are also looking at selling gas to other CGD operators.
What are the new areas where you see a prospective market for Adani Gas?
It actually depends on a number of cities that we may get. In the next three to five years, we should be in 30 cities. We are looking for new areas and do not have any preferences as such. We are ready for even Ernakulum and Assam as well. In the past, we bid for Rajamundhri, Jalandhar and Ludhiana. We do not have any specific choices. We have signed an MOU with IOCL. Accordingly, we will bid for all new cities along with IOCL.
What is the financing model followed by CGD business at large? What are the major challenges faced by CGD business while accessing finance?
We have been raising debts from financial institutions and banks. Our debt equity ratio is 2:1. CGD is completely a balance sheet financed business and it can never be run on project finance. The model of CGD business is such that it requires strong promoters.
What is the capex required for developing a CGD infrastructure in a given city and what are the expected returns on the investment?

Each city is different and thus investment required in CGD differs from city to city. In Khurja, we have made investments to the tune of Rs 30 to 40 crore, in Lucknow we have invested Rs 50 crore, and in Ahmedabad Rs 600 crore. It all depends on how much the city is and what you are doing there. Key CAPEX components are steel pipeline, polythene pipeline and CNG station.

Returns are different for each consumer segment and depend primarily on the input gas price and the sale price. CGD companies having access to APM gas have higher returns guaranteed unlike companies which are dependent on the R-LNG.

Except excluding the cost of land, each CNG station costs Rs eight to 10 crore involving civil works and setting-up of equipment. Pipeline cost turns out to be Rs 70 lakh per km for eight to 10 inch pipeline. It's a complex business. Most importantly, you have to consider, where is the gas coming from and at what cost? If Gorgon gas is going to come at US$ 17, then at what price are you going to sell it? Your cost and profit in a city are also dependent on factors such as what is the spread-geographical area (GA) like and what are the demand pockets within it.

Say, when price of input is frozen, then you have to see, where you are going. It depends on company's philosophy. You may decide to go at 14 percent internal rate of return (IRR) or one may work in a city at Re 1 IRR for strategic reasons. May be one city is not paying back but ten cities together are. It's a portfolio and call of the company as to for what benefits and reasons what pricing is to be done.

"If there are going to be multiple players in CGD, then things will not happen. At least, in our experience, nowhere else in the world, have we seen infrastructure in the same city being laid by two entities."

All these decisions are taken at the time of bidding considering that this city may not have potential today but strategically in times to come; the city could prove good for the company. For example, in case a city is falling within 200 km from the next city, then today the case may be that in this place the buses are running on diesel because there is no other alternative fuel. May be seeing the potential of 200 buses plying and converting them to CNG could be one opportunity that we see and thus take-up this city. Secondly, it might be that the industries have closed down in the area owing to non-availability of fuel, so I take fuel there and industry may start again.

Khurja is a typical example. Khurja per se is a non-decrepit city in a small town of Uttar Pradesh. More than 500 industries closed down in the city in absence of coal supplies. Now, taking gas to the area may revive ceramic industry in the city. So, you have to sense an opportunity and work accordingly.

Cities in India are in all likelihood going to witness presence of multiple CGD operators, as much as in Gujarat today. What are the ways in which a CGD company would differentiate itself with respect to its competitors?
We have a strong domain knowledge and have put in place strong systems and infrastructure for our operations. We are futuristic in our outlook and have set-up ourselves to work at multi level location.
How do you see marketing exclusivity provided on the CGD business affecting the profitability of CGD companies in their respective areas of operations? What could be the possible policy changes that would make marketing exclusivity clause more robust for further promoting the growth of CGD business?

If there are going to be multiple players in CGD, then things will not happen. At least, in our experience, nowhere else in the world, have we seen infrastructure in the same city being laid by two entities. When you talk about CGD infrastructure - it cannot be equated to industries such as telecom, where creating an infrastructure entails putting up a tower to connect everybody wirelessly. Laying of CGD infrastructure is a highly capital intensive exercise, as it involves high cost in putting the lines through to each and every house. Our country cannot afford to waste money in duplication of infrastructure at least in pipelines.

However, as per the regulation by PNGRB, the marketing exclusivity period for leading CGD players is soon going to come to an end and in that respect, everyone would be free to sell gas in the market. But in reality it's a far-fetched idea. In electricity sector where the regulations have been in place for some time and have somewhat matured, even there, you are not free to get power from any source of your choice. Only the large consumers have been allowed to do so. Secondly, the biggest question is do we have enough gas available for existing as well as upcoming CGD operations? Availability of gas is the biggest concern. Energy in any form in this country, be it coal or gas or electricity is going to be in shortage for some time. Let's face the facts, open access can only be effective if you have surplus commodity.

What are your suggestions for making PNGRB a more independent and transparent regulatory body? What are the specific policy areas related to CGD that require a change?

A regulator has to be independent, transparent and strong. If you want to develop a particular sector, you should be free from any cumbrances from any government. Change is a part of the process of evolution. We keep suggesting required changes to PNGRB. Some of which are accepted and some are not. And we are perfectly fine with it.

One particular area that needs immediate attention is the bidding process. It may require certain modification in the act itself. The loophole in the existing bidding process is that it is encouraging obnoxious numbers. For instance, in the last bidding round, ie Round Three, for a particular Geographical Area (GA) someone has quoted 24,000 inch km of steel pipeline. Now, even if you take an eight inch pipeline, it will take 3,000 km of steel pipeline in the entire city. The claimed 3,000 km of pipeline has not been even laid in whole of Gujarat; forget about a city. And at the end of the day, one has to make money. It will cost you above Rs 2,500 crore to create such an infrastructure. Even the largest CGD network in the country has not put in this kind of money till date.

What is the way forward for improvising on existing bidding process to have lucrative and well-demarcated areas of operations in CGD business?

It's a subjective matter and can be dealt in different ways. Even if you go by district, it has its merits and demerits. For example, if you only identify Faridabad, then everybody would go for Faridabad, as it is profitable but nobody would be interested in going to Ballabgarh. However, you cannot say that people in Ballabgarh are lesser citizens than that of Faridabad and therefore, should not be getting gas. However, as a development philosophy, it's not a bad idea to have it as a district. There will be issues of non-lucrative or non-feasibility of certain areas, but then, on these parameters it's not an issue of district or city, but one pertaining to regulation.

Next you come to interpretation as to how you make rules to ensure the desired level of penetration, encompassing rural areas as well. Now this should come as some kind of social obligation rather than a bidding parameter. We have to have well demarcated boundary and you may call it district or by any other name. GAs such as Sonepat and Panipat attract lot of confusion as there is no physical identifiable demarcation of boundaries.

The need of the day is to have a definite set of framework and to make sure that it's uniform across the country. Well, one cannot say that Ahmedabad is a city whereas Mundra, it's going to a district and then for Gurgaon it's a small area. There has to be one single yardstick when it comes to demarcating areas for bidding. One can simply define urban development areas and then say that the player will also have to do adjoining villages as part of CSR activity. What we have been proposing to the board is that you give a city and define it.

"In CGD business at what price you are going to get your gas plays an important role in success of one's operations. So far, we have seen that allocations to CGD players have been lopsided. All CGD companies should be given equal and comparable allocations. Give them a level playing field and then see who is efficient or not."

For example, take our own case in Khurja. About 17 km of our pipeline leading gas to Khurja is passing through Bulandshar - so one should ideally put Bulandshar with Khurja given that Khurja is in Bulandshar district. But Bulandshar was made part of Dadri, which is 70 km away. Now the question is, who will bid for it as it is a non-lucrative area bereft of industries?

What is going to be the impact of entry of foreign players like BP into gas business in the country on Indian CGD companies?
BP has always been in upstream. I don't think they have ever been in CGD. They have come along with Reliance may be for bulk marketing of gas to large industrial units like power plants, fertiliser plants, steel plants. I do not see any major impact on CGD sector.
At present, we have huge variance in gas prices in the country. What are the steps that can be taken to remove the uncertainties and variations in gas prices in India?

Ideally gas should be uniformly priced. But that's not the case and differentially priced gas may benefit some and not benefit others. Uniform gas pricing can still be practiced in case of government owned establishments, where you can force projects that have government equity to pay a uniform price for the gas that they receive. In terms of pure private sector play, this cannot be possible.

Either you make the allocation of gas transparent based on bidding, but if you keep the divide between old and new players, you will not be encouraging new players.

What could be the impact of proposed gas price pooling on CGD business?

It's a complex subject. Firstly, why should not everybody buy gas at market prices? Secondly, if you have pooled price and have x price for CGD, then all CGD entities should be given the gas at this price. We are not saying provide subsidy, but if pooling is done, it should be for all the players and across the board.

In CGD business at what price you are going to get your gas plays an important role in success of one's operations. So far, we have seen that allocations to CGD players have been lopsided. All CGD companies should be given equal and comparable allocations. Give them a level playing field and then see who is efficient or not.

A possible solution could be to allot whatever gas is available to PNGRB and then at the time of authorisation, PNGRB can allot certain base quantity to the winning entity with which it can manage their businesses for a year or two.

Delhi is touted as a successful CGD model in the wake of the Supreme Court mandate to replace polluting fuel with CNG? Can Delhi's success be replicated in other parts of the country sans a legal mandate?

If it's about mandate, then we had none in Ahmedabad and Faridabad and still we are running a successful business in both the places.

Delhi is not a model for CGD to look at because here CNG market was created by Court orders. For example, in Gujarat, gas market including the CNG market is independent of any court orders.

I believe it is the market which should decide which fuel is better and economical. In a multi-fuel market, it's a free choice to pick up x fuel over y driven by convenience, distance and fuel cost.

We spend considerable amount of time in marketing CNG. Additionally central and state governments should also do there bit to promote CNG by lowering the taxes on it.

(InfralineEnergy thanks Rajeev Sharma, CEO (Gas Business), Adani Energy Limited 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.)