Govt puts the foot on gas infra: Here’s why it could be the next big theme to watch

Weeks before the budget announcement came the inauguration of the landmark Kochi-Mangaluru pipeline in early January after protests, delays and cost escalation. Launched in 2009, the 444-km long gas pipeline was laid by the Gas Authority of India Ltd (GAIL) and sourced from a terminal in Kochi built by Petronet LNG. With 2,750 existing domestic gas connections, the Kochi-Mangaluru pipeline already supplies 3.8 million cubic metres of gas per day to industrial and residential customers in Kochi. With work already underway to expand in more areas, the daily supply is expected to increase to around 4 million cubic metres in the coming years. Overall, the pipeline has connected a large part of Southern India to the gas grid and is a major addition to the gas pie.

Another key initiative of the government has been the unified tariff regime that came into effect in November and is aimed at bringing together nearly all key interstate pipelines and make all customers pay a unified tariff.

Earlier, tariffs for transportation of gas were set by PNGRB for each pipeline based on assumptions of gas volume to be transported over its operating life, so as to ensure a 12 percent post-tax return to the operator. The tariffs for pipeline usage are divided into zones of 300km, with the tariff increasing for zones further away from the point from where gas is injected.

Further, if a buyer needs multiple pipelines even from the same operator, the transport tariff would increase. This tariff structure results in a higher cost for buyers located at a distance from the point of gas injection. All of India’s imported natural gas arrives at terminals on the west coast, so the cost is steep for users on the east coast—by as much as $2-3 per million British thermal units.

The new regulation will fix tariff prices within an integrated pipeline network such as that of GAIL. Now, the tariff will be divided into two zones: Zone 1 tariff will be 40 percent of the Zone 2 tariff. Zone 1 is the first 300km of each of the respective pipelines and the Blended unified tariff using current volume will end up being close to Rs 57/mmbtu.

While experts are of the view that this would increase costs for some players and there could be some legal challenges, the stakeholders have not come back with any comments on the same.

Simultaneously, the regulator also announced the open access regulations for the city gas distribution companies. Earlier, the fear was that city gas distribution companies will have to let go of 20 percent of their volumes to other players in order to get in more competition in the sector. The PNGRB in its notification, however, did not allow the existing compressed natural gas (CNG) outlets of state-run oil marketing companies (OMCs) in CGD areas to sell the fuel through the open access route, implying that CNG sales volume of existing CGD players like Indraprastha Gas Ltd (IGL) and Mahanagar Gas (MGL) will not decline immediately.

A section of the industry, however, notes that competition is imminent and profitability would be challenged eventually. IGL has filed a case with the Delhi High court challenging the concept of “exclusivity” and the matter is still sub-judice.

The government has also launched the Indian gas exchange, which is a subsidiary of the Indian Energy Exchange. Already, major players like GAIL, ONGC, Adani Total Gas, Torrent Gas have acquired a stake in the exchange and looking to increase it.

PNGRB has also come out with a draft LNG policy where the government targets to convert 10 percent of long-haul heavy-duty trucks to ply on LNG and incentivise automotive companies towards manufacturing LNG-based heavy vehicles. This would be done by creating ancillary manufacturing units through tax exemptions and green certifications. There is also a plan to create enabling infrastructure for the operation of a virtual gas pipeline for transporting LNG through railways and trucks and the policy envisages the promotion of dedicated highways with extensive LNG infrastructure.

Another big trigger could be the government’s focus on getting gas under the goods and services tax (GST) regime. A lot has been said about the same and industry is closely watching out for further developments on the same.

But a lot of investment in research and development needs to be undertaken to achieve the ambition of a gas-based economy. High demand for gas will need a commensurate rise in infrastructure as well and the government is focusing on that as well by organising bids for city gas distribution in different regions and promoting LNG infrastructure as well.