2011 Marked by Important Initiatives in Oil and Gas Sector

The Year 2011 has been marked by significant developments in the Oil and Gas sector as the Ministry of Petroleum and Natural Gas took several important initiatives for the growth of the sector. Some of these include approvals for induction of new partners in upstream-projects, commissioning Bina Refinery, bidding for NELP-IX blocks and acquisition of 25% equity stake by OVL in Satpayev block in Kazakhstan.  The prices of sensitive petroleum products i.e. Diesel, domestic LPG and PDS Kerosene were maintained at affordable levels by substantial duty cuts,  Government’s cash assistance   to OMCs and contribution of upstream PSUs.

Exploration and production

To give a boost to domestic exploration & production efforts, bidding process for exploration blocks under Ninth Round of New exploration Licensing Policy (NELP-IX) was completed with a number of Indian and Foreign oil companies bidding for these blocks. The decision on award of blocks would be taken soon.  The government also approved the induction of BP  as RIL’s partner in their fields and the strategic sale by Cairn PLC, UK of its stakes in Cairn India Ltd to Vedanta Resources PLC. These measures are expected to accelerate the E& P activities  in the country.

Augmenting supply of natural gas

Besides efforts to increase domestic gas production, discussions were further held in the direction to implement proposed cross border Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline project.  The Iran-Pakistan-India (IPI) pipeline project is also under consideration/discussion for sourcing natural gas. Liquefied Natural Gas(LNG) imports have picked up to meet domestic needs. Along with other projects, LNG import terminal is being built at Kochi which is progressing well. India is increasing its current RLNG regasification capacity from the current 13 million tons per annum to well over 30 million tons, by 2015. The Government is also endeavouring to increase the pipeline infrastructure in the country especially in southern and eastern regions of the country. To carry gas across the length and breadth of India, 8,000 kms of gas pipelines are being laid while another 5,000 kms are under the bidding process. The City Gas Distribution projects to supply Piped Natural Gas (PNG) and Compressed Natural Gas (CNG) are also being encouraged to expand availability of cleaner fuels.

Oil diplomacy in higher gear

In order to achieve the objective of oil security, the Ministry of Petroleum and Natural Gas engaged several countries/for a in bilateral/multi-lateral talks.  These include attending/holding international meets like International Energy Forum meet at Riyadh, ASEAN Energy Ministers Summit at Brunei, WPC at Doha,  India-Africa Hydrocarbon  Conference in Delhi and 4th Asian Energy Ministerial Roundtable at Kuwait. Indian delegations also had bilateral talks with various oil rich countries including   Saudi Arabia, Canada, Iran, Qatar, UAE, Nigeria, Oman, Kazakhstan, Bahrain, Turkmenistan, Indonesia, etc. to enhance cooperation in hydrocarbon sector. These engagements create conducive environment and lead specific projects and activities for mutual benefits.

Among major successes in the oil diplomacy during the year include signing of an agreement between national oil company of Kazakhstan   and ONGC Videsh Ltd. (OVL), for 25% participating interest in  Satpayev field. The Indian proposal for formulating a joint strategy to maintain stability in global oil prices  endorsed by 60 odd countries at the International Energy Forum (IEF) meet in Mexico, was re-enforced at the Extra-ordinary Ministerial IEF meeting at Riyadh.

Augmenting Surplus refining capacity for value addition

The refining capacity in the country has been augmented to about 194 Million Metric Tonnes Per Annum (MMTPA), with the completion of commissioning of  the refinery project at Bina, (6 MMPPA). The refining capacity is well above the annual demand of about 142MMTPA. This is significant for a heavily import-dependent country like India as domestic value addition helps earn foreign exchange by way of exports. Oil sector maintained its status of the highest export revenue earner amongst mercantile products with the country exporting about 59 MMTPA finished petroleum products valued at US$ 43 billion during 2010-11. The momentum has been sustained during current fiscal with an exports of about 42 MMT in the period April-November 2011 valued at US $ 38 billion. Further,  other refinery projects both grass-root and expansion are underway so as to increase the refining capacity to 238MMTPA by 2013.

Expanding infrastructure for LPG to rural households

To provide clean cooking fuel in rural areas and to achieve 75% population coverage with domestic LPG a number of LPG distributorships are being set up transparently under Rajeev Gandhi Grameen LPG Vitrak Yojna (RGGLVY). Launched in March 2010,  Oil Marketing Companies (OMCs)  have so far advertised over 3700 locations in rural areas to open LPG agencies under this scheme.  Nearly, 800  RGGLVs have already been commissioned.  This measure will greatly improve the cooking conditions in the kitchens of rural house-holds.  The scheme also provides new employment opportunities for the rural population leading to overall economic prosperity.  Youth in the age group of 21-45 years are being appointed as distributors under the scheme.

Equitable burden-sharing marks pricing reforms

As part of major pricing reforms, prices of Petrol  were reduced twice by OMCs in the second half of the year. The OMCs are revising petrol prices since its deregulation on 26.6.2010. The Government effected significant central duty reductions on diesel, crude oil and petrol products in June in order to keep prices at affordable level in case of diesel, domestic LPG and PDS Kerosene. Despite this,  OMCs are expected to incur under-recoveries of over 1,30,000 crore during the current fiscal year. Thus consumers have been greatly insulated from the impact of high global oil prices which have ruled at about US $ 110/bbl this fiscal against US$ 84.09/bbl in 2010-11.

Promoting Ethanol blending with petrol

Petroleum Ministry continued to pursue implementation by the Ethanol Blended Petrol (EBP) programme during the year. Though faced with shortage of supply by ethanol manufacturers, the OMCs still managed to procure 36.19crore litres of ethanol during the supply cycle October, 2010 to September 2011 for blending with petrol at the level of 5 % against 55.87 crore litres committed by them. Besides non-supply of sufficient quantity  by ethanol manufacturers, the programme also faced the challenge of state specific issues in some states. The OMCs further issued tender notice to seek supply of 101 crore litres   of ethanol in the annual season commencing October 2011. However, the response by the ethanol manufacturers accounts for only about 60% ethanol needed for 5%  EBP in the notified States/UTs.

Anti - Adulteration Drive intensified

The drive to check adulteration of petroleum products and prevent its misuse, the Ministry directed OMCs to intensify their drive against the malpractices in  distribution. The support of OMCs was offered to State Governments to introduce vehicles tracking system for transportation of PDS Kerosene by the state Government administration. OMCs also introduced transparency portal carrying information about PDS Kerosene dispatches from OMC depots and about the domestic LPG Cylinders supplied by distributors. These information now available in public domain could help the consumers and the discerning public so that any misuse is reported to appropriate authorities for strict action. The OMC have carried out intensive inspections across their distribution networks to ensure better products/services to the consumers.

         The year 2011 has thus been very significant in terms of taking the sector ahead in exploration and production, effective harnessing of oil diplomacy for oil security, increasing refining capacity, ensuring affordable prices of sensitive petroleum products, intensive drive to ensure availability of better products & services.

RGTIL to commission four pipelines in 2013-14

Reliance Gas Transportation and Infrastructure Ltd. (RGTIL), a company promoted by Mukesh Ambani to transport gas from KG Basin, will complete four gas pipelines in next two years. These pipelines are:

• 928 km long Kakinada-Vasudevpur-Haldia pipeline with a design capacity of 26.7 mmscmd
• 577 km long Kakinada-Chennai pipeline with a design capacity of 26.7 mmscmd
• 538 km long Chennai-Bangalore-Mangalore pipeline with a design capacity of 13.3 mmscmd
• 585 km long Chennai-Tuticorin pipeline with a design capacity of 13.3 mmscmd

All four pipelines will be commissioned in 2013-14. Presently the company has commissioned just one pipeline, 1385 km long East-West pipeline, connecting Kakinada-Hyderabad-Uran-Ahemdabad. This pipeline was commissioned in April 2009.

GSPL to tie up funds for Mehsana-Bhatinda line in January

Gujarat State Petronet Ltd (GSPL) — a Gujarat Government-owned GSPC Group company — plans to achieve financial closure for the 1,670-km Mehsana (Gujarat)-Bhatinda (Punjab) gas grid in January, according to sources.

The project, estimated to cost Rs 3,500 crore, is being implemented by a special purpose vehicle, with 52 per cent majority holding of GSPL.

In addition to the natural gas sources in Mehsana, the proposed trunk pipeline is scheduled to connect the LNG terminals of Petronet LNG (Dahej) and Shell (Hazira) and others through the existing Dahej-Vijaipur Pipeline (DVPL) operated by GAIL. PSU oil refiner Indian Oil has a 20 per cent participatory interest in the project, and Bharat Petroleum and Hindustan Petroleum 11 per cent each.

The Rs 1,000-crore GSPL is a listed subsidiary of the State Government-owned Gujarat State Petroleum Corporation and owns 1,600 km of transmission network in Gujarat.

The company has already transferred nearly 400 km of distribution network to group city gas arm GSPC Gas and is planning to add another 1,000 km of transmission network in the State.

The Mehsana-Bhatinda segment is one of the three legs of the proposed 4,000-km grid connecting the KG Basin's natural gas sources at Mallavaram (Andhra Pradesh) to Srinagar in J&K, which were auctioned by the Petroleum and Natural Gas Regulatory Board (PNGRB).

The GSPL-led consortium owns the right to construct and operate the two other legs Mallavaram- Vijaipur (Madhya Pradesh) connecting DVPL; Mehsana (Gujarat)-Bhatinda (Punjab) and Bhatinda-Srinagar (J&K).

The total estimated project cost of the three legs is nearly Rs 12,500 crore.

According to GSPL sources, of the three projects, the Mehsana-Bhatinda and Bhatinda-Jammu sections have been put into one SPV, while the Mallavaram-Vijaipur project will be undertaken by a separate SPV.

Petroleum and Natural Gas Regulatory Board pushes for deregulation of gas prices

The Petroleum and Natural Gas Regulatory Board (PNGRB) is aggressively pushing for deregulation of gas prices to encourage private investment and lure oil companies to invest in exploration and ramp up production from existing fields, a senior regulatory official said.

The government has fixed the price of natural gas at $4.2 per unit for most of the domestic output, less than a third of the price of imported liquefied natural gas, creating a wide disparity in the market.

"Pricing freedom is a must if we have to encourage companies to invest in the gas sector so in the coming few months I will focus on trying to convince the government to move towards deregulating gas prices," a senior PNGRB official, who did not want to be identified, told ET.

"The government could introduce a sector-specific pricing model where gas producers could do a separate price-discovery for various sectors like fertiliser, power and city-gas distribution (CGD) to arrive at a proper pricing benchmark that truly reflects the appetite for gas in a particular sector," the official added.

This view, coming from a regulator, is significant as industry experts believe that companies have no incentive to invest in the sector until gas prices are deregulated. They say pricing freedom is imperative as natural gas production in the country has fallen sharply.

Output at Reliance Industries' (RIL) D6 block in the Krishna-Godavri basin, home to the country's largest gas finds, has fallen to 39 mmscmd from 60 mmscmd.

While the regulator is pushing for deregulation of gas prices, the petroleum ministry has not articulated such a view. In October, petroleum minister Jaipal Reddy told ET that "deregulation of gas pricing is a very complex issue and carries a lot of historical baggage especially as a number of empowered groups of ministers has deliberated on the subject and no definite consensus has emerged as yet. It is being discussed although I cannot give a definite timeframe to when the government will take a decision."

Currently, gas from RIL's D6 block is priced at $4.2 per million British thermal units, and other domestically produced gas is sold at a wide range of $1.8-5.7 per mBtu while imported gas in its liquid form (liquefied natural gas, or LNG) costs upward of $13-14 per mBtu.

Discussing the delay in the third round of the city-gas distribution (CGD) auctions the PNGRB official said, "The bidding process for the third round of CGD auctions has been delayed as the feasibility reports submitted by some companies seem uneconomical as some financial parameters outlined by them seem unviable. We are also waiting for our new members to join and take a combined view on the matter. We plan to announce the winning bids by Jan-Feb 2012."

In the third round for CGD auctions that concluded on February 18, 2011, bids were invited for installing and running a CGD network in Asansol-Durgapur (West Bengal), Bhavnagar, Gandhidham-Anjar, Bhuj-Mundra and Jamnagar (Gujarat), Ludhiana and Jalandhar (Punjab) and Panipat (Haryana). The round saw 51 bids from 26 companies, including IOC, Adani Energy, Gujarat State Petroleum Corp, Engineers India, GAIL Gas, British Gas and IGL.

Discussing new pipeline projects, the PNGRB official said, "We have just finalised the bids for four major trunk pipelines and companies like GSPL, IOC, HPCL, BPCL and GAIL have lined up close to Rs 15,000 crore of investments for these projects." He said that the consortium of GSPL, IOC, HPCL and BPCL have won the bids for building the pipelines from Bijaipur-Bhilwara, Mehsana-Bhatinda and Bhatinda to Srinagar.

Supply crunch: govt uneasy over falling KG output

The government is in a tizzy over the continuous and sharp decline in gas production from the KG-D6 field operated  by Mukesh Ambani-led Reliance Industries Ltd. The decline in production from the field — one of the world’s largest — seems to be hitting gas allocations to crucial core sector industries including power, fertiliser and even the city gas distribution sector that includes supplies of CNG to automobiles and piped gas to households. To arrest this “worsening situation”, the government has initiated diplomatic parleys with major gas producing countries such as Australia, Brunei, Nigeria, Indonesia, Russia besides Qatar on which India has so far been depending heavily for the bulk of its LNG imports.”
The production from KG-D6, after peaking to a level of 60 million standard cubic meters of gas per day (mmscmd) has currently come down less than 30 mmscmd even though the company had promised to achieve a peak production of 80 mmscmd during the current fiscal year.
“The supply situation (from KG-D6) has worsened further …the country is faced with a shortage of natural gas, and we (India) will have to increasingly rely on imported LNG,” said an internal note of the ministry of petroleum and natural gas.
“The ministry is making diplomatic efforts at the government level with LNG-producing countries for long-term sourcing of LNG and is also encouraging GAIl and ONGC Videsh to invest in LNG plants abroad so that equity LNG can be brought into the country,” the note said.
The ministry’s note mentioned the Russian government’s Yamal LNG project in the Arctic. Novatek, Russia’s second-largest gas company, has invited OVL to participate in the project. OVL has submitted its indicative bid, on behalf of an Indian consortium, to take 15% interest in the project. Novatek has accepted the bid and invited OVL for discussions.
Some of the recent LNG deals include that of Petronet LNG Ltd (PLL) with Mobil Australia Resources Company for long-term supply of 1.4 MMTPA of LNG; MoU between PLL, GSPC, GAIL and IOC with Gazprom Marketing and Trading Singapore for long-term LNG sourcing of 2.5 MMTPA each (total 10 MMTPA) from LNG project in the Russian Federation. The MoUs relate to supplies over a period of 25 year and expected to commence from 2016.
The ministry’s note further said that in countries like Brunei and Indonesia, “GAIL has got an offer of long-term LNG supplies from Brunei. The two sides are in commercial negotiations and hope to clinch a long-term deal.”

IGL demands Delhi sale monopoly end only in '13

Companies in the city gas distribution (CGD) business wishing to enter the fast-growing compressed natural gas (CNG) market of Delhi might have to wait longer.
The stipulated marketing exclusivity of Delhi’s monopoly CNG player, Indraprastha Gas Ltd (IGL), ends on December 31. However, the company has demanded that the three-year exclusivity period be counted from the date when Section 16 of the Petroleum and Natural Gas Regulatory Board (PNGRB) Act was notified, on July 15, 2010, and not from the date when the company got authorisation, in January 2009.

Indraprastha Gas has written to the petroleum and  natural gas ministry and the PNGRBin this regard. “Since the Board had no powers before July 15, 2010, they have no powers to determine and impose an exclusivity period. The period should start from July 15, 2010 and end on July 14, 2013,” M Ravindran, managing director of IGL, told Business Standard.
The ministry did not notify Section 16 when the rest of the PNGRB Act was notified on October 1, 2007. This section authorises the downstream oil regulator to lay, build, operate or expand a city or local natural gas distribution network.
PNGRB regulations provide for a marketing exclusivity of three years for companies present in a city prior to the regulations and of five years for new ones. Though IGL was present in Delhi since 1998, it was formally granted authorisation for the city gas distribution business in Delhi and the National Capital Region on January 1, 2009. Therefore, according to current PNGRB regulations, the exclusivity period should end on December 31, 2011.
Companies in the city gas business are also entitled to a network exclusivity of 25 years, extendable by another 10 years if the operator meets all the terms and conditions.
While this 25-year period ends in 2033, according to the original PNGRB regulations, if the government and Board agree to the demand of IGL, it will end in July 2035.
The Bombay Stock Exchange-listed IGL is a joint venture between the Delhi government and Union government-owned Bharat Petroleum and GAIL India. The company was formed in 1998 to take over CGD operations in Delhi, which got a boost from a Supreme Court order asking all commercial transport in Delhi to move to this fuel.

Power latest to suffer from Reliance Industries' D6 output fall

In less than a month of stopping supply of cheap gas from the D6 block to city gas distribution firms, the government has ordered cuts in supply to power plants as output from Reliance Industries-operated block has slumped below 40 million standard cubic meters per day (mmscmd), a government official said.

As a fallout of the cut, city gas distributors are planning to raise prices of gas supplied to kitchens and automobiles as they will have to substitute the supply with imported liquefied natural gas (LNG), which costs four times the local gas, executives working for two city gas distribution firms said, requesting anonymity.

The government has fixed D6 gas at $4.20 per unit for five years ending April 1, 2014 while LNG in spot markets cost $16-18 per unit. Dwindling output from D6 is now affecting the power sector, which is facing a pro-rata supply cut due to about 21% reduction in D6 gas supply. They are forced to buy costlier imported fuel to run their plants.

Against the signed gas sale purchase agreement (GSPA) for 29 mmscmd, power firms are getting about 22-23 mmscmd gas. "Theoretically, if output drops further to below 17 mmscmd, no KG-D6 gas would be available for power sector and allocation to LPG (liquefied petroleum gas) sector could be affected. Fertiliser sector consumers would be the last to face supply cuts," a government official with direct knowledge of the matter said on condition of anonymity.

The oil ministry had stopped supply of D6 gas to non-core consumers such as steel, refineries, petrochemicals and captive power plants since March 30, 2011 to meet demands of core sectors, fertilizer, LPG, power and CGD in the order of priority. ET reported it first on April 23.

An EGoM, which is headed by Finance Minister Pranab Mukherjee, had fixed D6 gas price and identified its consumers much before the first gas from the block produced on April 2, 2009. It had allocated 63.61 mmscmd gas on firm basis to several consumers and 30.16 mmscmd on fall-back basis on the premise that the D6 would achieve a peak production of 80 mmscmd by 2012-13.

But output from the block started declining since March 2010 after peaking at about 61.8 mmscmd due to unexpected reservoir behaviour. According to oil minister Jaipal Reddy's written statement in the Lok Sabha last week, Reliance-operated D6 block experienced steep decline in gas output because it drilled only 22 wells against 31 wells approved for drilling by March next year.

Karnataka will set up specialised agency to speed up PPP projects

The state aims to hike spending on infrastructure from 3.2% of Gross State Domestic Product to 8-9% during the Twelfth Plan.
Karnataka state, which presently invests 3.2 per cent of its gross state domestic product (GSDP) on infrastructure development, has set an ambitious target of increasing this to 8-9 per cent of GSDP during the 12th five year plan period. The state’s GDP was an estimated Rs 328,000 crore in 2010-11.

“Our vision in the realm of infrastructure development is to achieve the twin objective of high growth and equity by enabling access to safe and affordable infrastructure services for the people of Karnataka,” D V Sadananda Gowda, chief minister of Karnataka, said.
Delivering his key-note address at the second annual Business Standard Infrastructure Round Table 2011, he said the government has given utmost priority to infrastructure development and has adopted a holistic focus that has led to development of mega projects across the state.
The role of the private sector and the community is emphasised in the overall development of the state. The mode of implementation of projects in Karnataka is gradually shifting from government-sponsored to public-private partnership (PPP) — a win-win situation for all stakeholders.
Gowda said 105 infrastructure projects are being undertaken through the PPP format. These are at various stages of development and involve an investment of Rs 80,946 crore.
“There have been challenges in implementing PPP projects. Some concerns have been expressed by developers. At every step we have taken corrective measures to address these concerns. The state is giving a new life to the PPP format,” he said.
Explaining the measures initiated by the government to give a fillip to infrastructure in the state, he said the government is moving the Infrastructure Bill, which provides for the constitution of an Infrastructure Authority that would expedite the development of infrastructure projects in PPP formats.
“To provide viability gap funding for infrastructure projects, we have also introduced a VGF scheme for the state. We will involve leading transaction advisors to make an Infrastructure Investment Plan for Karnataka which will serve as the Master Plan. Transaction advisors will also help in identifying projects and build the capacity of government officials involved in implementing PPP projects. We are confident that these initiatives would definitely help in boosting the economic growth of the state,” Gowda said.
Gowda announced that the work on building minor airports at Shimoga and Gulbarga would be completed and the airports made operational by next July. Other major projects in the pipeline include an all-weather Greenfield port at Tadadi, a gas pipeline between Dabhol and Bangalore, city gas distribution for Bangalore, an integrated bulk water supply system and distribution schemes in many districts, a Intermodal Transit Centre at Subhashnagar and a Traffic and Transport Management Centre at Hebbal in Bangalore.
In addition to improving air connectivity, the government is also taking steps to improve rail connectivity in the state. Projects involving investments totalling Rs 24,000 crore are being undertaken, which include 2,137 km of new railway lines. Gauge conversion and doubling of lines are also being undertaken, the chief minister said.
“In this regard, we had a detailed meeting with the ministry of railways and I am happy to share that three new railway lines — Gadag to Wadi, Kengeri to Chamrajnagar and Srinivaspura to Madanapalle — have been approved. On completion of these projects, the rail density, which is measured in number of kilometers of rail line per thousand square kilometer of area, would increase from the existing 16 to 23,” he said.
Bangalore recently witnessed the launch of commercial operations of one stretch of phase-I of Namma Metro from Baiyyappanahalli to M G Road. In-principle approval for phase-II has also been received.
The state is well connected to its neighbouring states and other parts of India and the world through road, rail and air. With 14 national highways, the state accounts for six per cent of the total national highway network in the country. Inter-state road connectivity is primarily by way of the 114 state highways.
With the development of industrial corridors under the Suvarna Karnataka Development Corridor programme, industrial nodes and industrial areas along national highways will emerge. Overall development is proposed to cover regions that spread over Bangalore to Bidar via Bellary, Tumkur to Honnavar via Shimoga and Chitradurga to Mangalore via Udupi, Gowda said.
“Core infrastructure such as energy, road and rail linkages, inland container depots, free trade zones and urban infrastructure would be benefited by this corridor, making a significant impact on Karnataka’s economic growth,” he added.

Natural Gas Fueling Stations Popping Up Around The Country

It had to happen sooner or later. Natural gas is considered a much cleaner fuel than petroleum. Now a company called NCI is building natural gas fueling stations in Lee County, Florida for the general public and businesses. The fist will be a service station near Southwest Florida International Airport. Earlier this year, the city of North Little Rock built its first condensed natural gas fueling station, which is open to the public. Consumers, businesses, and governments are gradually making the shift, which should increase demand for natural gas.
There are many publicly traded companies involved in the distribution of natural gas, to both homes and businesses, and over 15 over them have yields in excess of 3%. For example, Atmos Energy Corporation (ATO) is involved in the distribution, transmission, and storage of natural gas. This Dallas, Texas based company, which was founded in 1906, trades at 13 times forward earnings and pays out a very favorable yield of 4.2%. Dividends on an annual basis increased from 1.37 to 1.38 per share. Earnings for the latest quarter were up an incredible 27.6% on a 1.4% revenue increase.
Another high yielder is Spectra Energy (SE) transports and stores natural gas for customers in various regions of the northeastern and southeastern United States, plus the Maritime Provinces and the Western Provinces in Canada. The company, based in Houston, trades at 16 times forward earnings and boasts a yield of 3.8%. Latest quarterly earnings were up an amazing 28.9% on a 10.2% rise in sales.
Other natural gas companies worth taking a closer look at include Northwest Natural Gas (NWN) at a 3.8% yield, WGL Holdings Inc (WGL) paying 3.7%, and Sempra Energy (SRE) at 3.6%. You can access a free list of over 25 natural gas companies, along with their financial data, at WallStreetNewsNetwork.com.

Centre should lower CNG rates: Gujarat govt

The state government has argued before Gujarat High Court that the Central government should provide CNG to the state at lower rates. The state government pleader was arguing over the PIL seeking CNG at lower rates to the state.
PK Jani, the government pleader, on Thursday argued before the high court bench that the companies in the state are providing domestic gas to 8.7 lakh households while they provide CNG to 2.6 lakh vehicles through 240 CNG outlets in the state.
The state saves subsidy of over Rs660 crore to the Central government as it gives Rs360 subsidy per domestic LPG cylinder while Rs10 per litre in petrol and diesel. Therefore, the Central government should extend the benefit of saving of Rs660 crore to the people of Gujarat by allocating CNG at the rates given applicable to Delhi and Mumbai.
Earlier, by filling an affidavit, the Central government had informed the high court that it cannot supply CNG to Gujarat at the Administrative Price Mechanism (APM) rates due to shortage. The Union government further said that Gujarat was already getting 27% of CNG out of total allocation in various cities in the City Gas Distribution System (CGD).
The affidavit states, "Of total firm allocation of 1.222 MMSCMD for CGD sector for the entire country, 0.326 MMSCMD has been allocated to the CDG sector in Gujarat, which is around 27%."

7th Annual Conference on CITY GAS DISTRIBUTION IN INDIA

http://www.indiainfrastructure.com/confpdf/conf_citygas_march2012.pdf

IGL v/s Gujarat Gas: The better bet

City gas distribution (CGD) companies have enjoyed enormous investor confidence in the last few years, consistently beating the Sensex (Indraprastha Gas and Gujarat Gas have offered average annual growth rate (CAGR) of 26% and 28% respectively w.r.t to the markets) in the last four years. The sector seems set to benefit from relatively under penetrated markets (gas consumption accounts for just 9% of Indian energy matrix versus 23% globally). The city gas distribution story has many facets- regulations , infrastructural aspects, gas supplies, pricing and the business economies. The country is perennially short of energy supplies in comparison to its needs. With 70% dependence on substitutes like oil imports and inadequate coal supplies, the natural gas seems to be the answer to India's energy woes. This makes the city gas distribution story look promising. The companies that are playing the key roles here are the likes of Indraprastha Gas (IGL), Gujarat Gas (GGAS), Mahanagar Gas and Gujarat State Petroleum Corporation Gas (GSPC Gas) that control 84% of the CGD market volumes. These are the companies that procure gas from suppliers like Gas Authority Of India Ltd. (GAIL), Reliance Industries Limited (RIL) and transport it through their pipeline network to the end users - the industrial and retail users. Among the four key players, we will compare GGAS and IGL - the two players that have lost 23% and 16% on the bourses since their September 2011 peak.

Let us start with the basics of the two companies

The 'Promoter's premium'

IGL's promoters are Bharat Petroleum Corporation Ltd. (BPCL) and GAIL, each having 22.5% stake in the company. Having backing of strong players like these makes the availability of imported gas more secure, without compromising its access to domestic gas supplies at subsidized prices. Gujarat Gas, which has in the past enjoyed 65% promoter stake of BG, however, seems to be losing in this regard with the recent announcement of stake sale by BG. While GGAS has more than 65% of gas sourcing already tied up by way of long term supplies (2018), the potential new supplies and even the bargaining power while making spot purchases is something we expect to suffer as a result of this event. The GGAS stock took a hit of 6% immediately after the announcement. However, with lot of potential suitors keen to own BG's share, the company may face aggressive bidding, thus firming up the stock price.

The 'Operational' factor

Both IGL and Gujarat Gas are leading players in City gas distribution segment. However, there is a stark difference in the category of clients they serve. While Gujarat Gas predominantly serves regions in Gujarat, IGL operates in NCR. Around 80% of Gujarat Gas' client base comprises of industrial customers and 10% comprises of Auto gas, unlike IGL which has key focus on supplying CNG for public transportation (80% of its business) and 10% to the industrial customers.

This makes a difference when it comes to the wiggle room available to hike prices (which in turn is a function of price of substitute fuels). For IGL, diesel and petrol are the key substitutes (of auto gas) that are approximately 52% and 23% costlier than CNG. For Gujarat Gas customers which are mainly industrial, the key substitutes are fuels like naphtha that are around 30% costlier than natural gas.

More on pricing...

IGL has 75% - 80% sourcing from domestic gas while Gujarat Gas' gas supplies are reliant on imported gas to the extent of 30%-35%. This makes Gujarat Gas less attractive in terms of margins. This is because there is a huge pricing differential between the domestic and imported gas. While the pricing of domestic gas varies between US$ 4.2 to US$ 7 .2 per MMBTU, the imported gas costs between US$ 10 to upto US$ 18 per MMBTU, depending upon whether they are procured under long term contracts or have been sourced on a spot basis. While both the companies have consistently increased gas prices, it will be a little harder for Gujarat Gas to continue the same in the future without impacting the volumes of gas sold. It is important to note here that Industrial segment is the most lucrative segment for any CGD company. However, the advantage for GGas is limited going forward since the regions in which it operates remain well supplied thus limiting the potential for price hikes. Gujarat Gas has already faced trouble in this regard as the textile industry and CNG based autos in the regions of Gujarat went for an indefinite strike in wake of price hikes in the current year.

While IGL has increased its prices by 50% in last two years (latest hike in October), Gujarat Gas has done the same by 40%.

To summarize, both the companies enjoy being the market leaders in their own regions. However, with the shortage of domestic gas supplies, the future performance will depend on how well they are able to maintain volumes without sacrificing margins - both on account of increasing share of the costlier imported gas and ability of the companies to pass price increases to end users.

In the next article, we will focus on the financial aspects of both the companies.

GSPC Gas Company hits 4-mmscmd mark in gas distribution

Gujarat government-owned GSPC Gas Company overtook all central government and private sector-controlled city gas distribution (CGD) ventures by supplying maximum gas, and in the process, has become the country's first CGD player to cross the 4 mmscmd-mark in gas distribution.

GSPC Gas caters to 1,355 industrial piped natural gas (PNG) customers, possibly the highest in the country. It supplies to 1050 commercial and 1355 industrial customers at 180 locations including towns and villages. It also operates 117 CNG stations to create the country's only CNG corridor in western India. Incidentally, GSPC Gas has the most expensive tariff in the country.

"GSPC Gas is dependent on liquefied natural gas (LNG) virtually for its entire gas requirement. Despite several price hikes in the past couple of years, demand for piped natural gas (PNG) is on the rise. GSPC Gas is facing several challenges on account of lack of cheaper domestic gas and the rising cost of dollar," said a top official of Gujarat State Petroleum Corporation (GSPC), the country's largest LNG trader and GSPC Gas promoter.

Criticising the central government's gas allocation policy and the role of the regulator, Gujarat energy minister Saurabh Dalal said, "It's unfortunate that Centre is neither allotting cheaper domestic gas nor allowing GSPC Gas to expand in new geographical areas. GSPC Gas would have become double if it had support from the Centre. It is saving close to Rs 500 crore annually by converting LPG customers to PNG and it can do much more. GSPC Gas is equipped with gas transmission lines to save even more funds on LPG subsidy if it does not have to be dependent on expensive LNG today."

He added that GSPC Gas is the country's largest CGD venture today without any central government support like companies in Delhi and Mumbai.

Today, Gujarat alone accounts for close to 55 mmscmd of gas consumption, which is one third of the Indian market. It includes 24 mmscmd of imported LNG, which makes Gujarat the largest user of expensive imported natural gas.

In June 2009, GSPC became country's first Indian entity to procure LNG cargo independently from countries like Australia, Qatar, Trinidad & Tobago, Egypt, Nigeria and US through Dahej and Hazira LNG terminals.

Demand Exceeding Supply of Natural Gas in India

According to a latest research report by RNCOS, “Indian Natural Gas Sector Analysis”, liquefied petroleum gas (LPG) and compressed natural gas (CNG) are positioning themselves as a future fuel option for both industrial and non industrial sectors in the domestic market. The number of LPG customers is expected to grow at a CAGR of around 6.5% to touch the mark of around 147 Million by FY 2014-end. This will result in a sharp growth of LPG demand, thus exerting more pressure on its domestic production and imports.

Our report further revealed that India produced 50.9 Billion Cubic Meter natural gas in 2010, which is still far less from the actual demand in the country. This shortfall has forced the government to opt for LNG imports at comparatively higher international prices. It is expected that the shortfall will further widen in FY 2014 with an expected demand of around 327 MMSCMD and supply of just 215 MMSCMD.

Our report also reveals that the pricing system in India is relatively complex due to the existence of a dual pricing system resulting in two distinct gas markets. In one market, gas produced by PSUs is allocated under the Administrative Pricing Mechanism (APM) decided by the government. In the other one, gas is produced by JVs or private companies and sold at prices agreed according to the PSCs.

Besides, our report “Indian Natural Gas Sector Analysis” is an outcome of widespread research and objective analysis of current industry developments including emergence of natural gas vehicle, shale gas, coal bed methane, city gas distribution, etc. It covers information related to government initiatives and also facilitates significant details on key players in the country including their key financials, strengths and weaknesses, and recent activities.

GAIL, HPCL and GCGSC Sign MoU for City Gas Distribution Project

GAIL, Hindustan Petroleum (HPCL) and Greater Calcutta Gas Supply Company (GCGSC) signed a MoU for a joint venture for city gas distribution, which is likely to require an investment of around Rs 20 billion.
GAIL and HPCL will hold 37 per cent stake each, while the rest will be owned the West Bengal government-controlled Greater Calcutta Gas Supply Company, official sources said.
The investment could be to the tune of Rs 20 billion for the project, GAIL Executive Director J Wasan said. The joint venture will look at various options of gas availability. “We are looking at all options Jagdispur-Haldia pipeline, CBM from Ranigunj and Durgapur, and even importing gas by a floating terminal,” Wasan said.
HPCL officials said it would take at least 2-3 years to execute the project.

KSIDC has joined hands with GAIL for a joint venture

KOCHI: Kerala State Industrial Development Corporation Ltd (KSIDC) has joined hands with Gail Gas Ltd to set up a joint venture company to implement Supplementary Gas Infrastructure in the State. The JV company formed is Kerala Gail Gas Limited ( KGGL).

The company's Board pf Directors approved the business plan prepared for the JV Project. This includes promoting city gas distribution projects, laying of spur line to provide last mile connectivity to bulk/large consumers of natural gas, setting up of CNG stations for KSRTC depots, CNG Stations for boat services, marketing of gas related equipments, setting up of captive gas-based power plants, etc.

Kerala Gail Gas Ltd will also set up a Gas Training Institute at Angamaly, near Kochi. For this project, the land will be provided by KSIDC.

The Gas Training Institute will be a Skill Development Centre for technicians and others in the natural gas business and will conduct short-term courses for skill development. The company is planning to promote a gas based power plant for the steel cluster at Palakkad, jointly with the Steel Manufacturers, Association.

Kerala Gail Gas Ltd will establish CNG Stations for KSRTC buses. The CNG Stations will be established in Kochi first since natural gas will be available here within one year time.