Faced with significant project delays owing to the impact of the Covid-19 pandemic, the incumbents in the city gas distribution (CGD) industry had petitioned the Petroleum and Natural Gas Regulatory Board (PNGRB) to allow for extensions in timeline for meeting the minimum work programme (MWP) commitments. Under the present CGD regulations of PNGRB, the CGD players have MWP obligations for each year in terms of the length of the pipelines, the number of compressed natural gas (CNG) stations and the number of domestic connections to be completed during each of their initial years after receiving exclusive authorisation to market gas in each specified area, also referred to as a geographical area (GA), which generally consists of 1-3 districts. If there is a delay in execution, the CGD regulations provide for imposition of penalties on the entities setting up the projects.

On November 5, 2020, the regulator issued an order granting more time to 41 CGD players setting up projects in 185 GAs to complete their network rollout commitment. A large number of these 185 GAs had received authorisation in the bid rounds 9 and 10. The time granted varies from 129 days to 251 days across different GAs, depending on the duration of the Covid-19 lockdown. The PNGRB has considered 69 days as the centrally-imposed lockdown period and 60 days as the restoration period.

The extensions permitted by the PNGRB are in line with the September 2020 guidelines that stated that the relative obligation of the entity affected by the force majeure (FM) events will be suspended for the period during which such FM lasts. The guidelines listed events such as war, riots, natural disasters and restrictions by the central or state governments as conditions that qualify under the FM and can result in a time extension to complete MWP obligations. Several CGD entities had claimed FM after work on sites got stalled due to the lockdowns.

While a majority of the 185 entities received the basic extension of 129 days only, 38 entities have received extensions ranging from 136-251 days. This is largely at locations that had longer state-enforced lockdowns. However, the industry had requested for a higher extension period – as high as two years in some cases, since the operational difficulties in terms of availability of labour and equipment continued even after the discontinuation of the lockdowns. The difficulties for CGD players associated with re-mobilisation and availability of equipment, labour and other resources to resume project execution are covered under the relief provided as the restoration period.

Given the strict penalties that can be imposed on players for delay in executing the MWP under the new CGD regulations, ICRA believes that the timely and clear communication from the regulator regarding the FM claims of the CGD players is a positive, as this will ensure that players are not complacent and are making every effort to create the committed infrastructure at the earliest. The PNGRB’s intent is also reflected in the selective approach while granting an extension on the basis of the actual impact of the lockdowns, instead of blanket extensions.

Additionally, on November 27, 2020, the PNGRB released final regulations for determination of the transportation rate for CGD. The regulations have kept most aspects of the access code unchanged, except clarifying further on open access. The PNGRB has clarified that the existing CNG stations of the franchise/dealers [oil marketing companies’ (OMC) CNG/ liquid to compressed natural gas stations] will not be considered as third-party shipper for the purpose of allowing access. While any additional capacity expansion at existing premise will also not be considered as a third party, setting up of CNG compressor at a new liquid fuel pumps will be considered as a third party. This comes as a relief for some large CGD players like Indraprastha Gas Limited (IGL) and Mahanagar Gas who have a significant portion (>50 per cent) of their CNG stations on the OMC networks. Accordingly, this regulation significantly lessens the risk of third-party competition and margin contraction for them.

The risk of third-party marketing would continue to remain for large industrial piped natural gas (PNG) markets catered to by players like Gujarat Gas, operating in Gujarat, given the price sensitive and large market as well the access to multiple gas sources in the vicinity. However, the impact would be limited as only a maximum of ~20 per cent of the pipeline capacity can shift to the third party.

In another development, on December 22, 2020, the Ministry of Environment, Forest and Climate Change, identified about 1,644 industrial units spread across 50 industrial areas in Delhi to switch over to PNG owing to the high levels of pollution. Additionally, the Delhi Pollution Control Committee (DPCC) was also directed to inspect and identify the industries using unapproved fuel and to take stringent penal action in case of non-compliance.  This directive by the Ministry to compulsorily switch to PNG in the NCR region is a positive development for CGD companies, both from an immediate as well long-term perspective. In addition to DPCC, IGL and the Delhi Government were also asked to work in close coordination with the industrial units to target the completion of infrastructure work and switch over to PNG by January 31, 2021.

The directive by the Ministry would help boost the industrial volumes of incumbent IGL. This would also necessitate an accelerated expansion of network in the industrial clusters. Additionally, with several cities in Northern India featuring among the top 20 most polluted cities globally, such as Jodhpur, Jind, Gurugram, Agra, Ghaziabad, Lucknow and Varanasi, other state pollution control boards may follow suit, which in turn would benefit the incumbent CGD entities in these cities. Accordingly, the move by the Ministry accelerates the trend of switch to cleaner industrial fuels, which began with the ban on use of pet-coke and furnace oil in October 2017 and is only expected to gather pace going forward considering the persistent high levels of pollution across Northern India.

To reduce distance-based tariff distortions in natural gas pricing, the PNGRB implemented the Unified Tariff Regime. The new pipeline tariff policy is based on the pooling of the approved tariffs for the pipelines forming the national gas grid. The entire pipeline network is divided in two zones – Zone-1 as first 300 km from injection point and everything thereafter falls into Zone-2. The tariff in Zone-1 is to be 40 per cent of the tariff in Zone-2 (refer Exhibit). The transmission tariff for majority of the players utilising a single pipeline whether in Zone-1 or Zone-2 would witness an increase in the transportation costs. However, consumers located in Zone-2 and receiving gas which flows through multiple pipelines would benefit with their tariff expected to moderate by around 40 per cent.

Name of the pipeline Pipeline operator Current tariff

(Rs/mmbtu)

 Unified tariff

(Rs/mmbtu)
Zone-1 Zone-2
Integrated Hazira Vijaipur Jagdishpur Pipeline GAIL (India) Limited 19.83, 36.86, 45.38, 49.64 26.75 66.87
Dahej-Uran Dabhol Panvel NG Pipeline 29.55, 39.85 26.75 66.87
Dahej-Vijaipur (DVPL)-Vijaipur Dadri (GREP) (capacity augmentation) 26.75 66.87
Jagdishpur-Bokaro-Haldia-Dhamra NG Pipeline 63.46 26.75 66.87
Dadri-Bawana-Nangal 14.04, 14.06 26.75 66.87
Chainsa-Jhajjjar-Hissar 7.85 26.75 66.87
Dabhol-Bangalore 45.37, 45.41, 45.44 26.75 66.87
Dadri Panipat Indian Oil Corporation Limited 16.46 26.75 66.87
East-West Pipeline Pipeline Infrastructure Limited 65.50, 75.33, 78.65, 79.77, 80.15 26.75 66.87
GSPL’s High Pressure Gujarat Gas Grid Gujarat State Petronet Limited 33.15, 34.84, 34.86 26.75 66.87
Shahdol-Phulpur Reliance Gas Pipelines limited 96.33 26.75 66.87
Mehsana-Bhatinda GSPL India Gasnet Limited 0.90, 41.39 26.75 66.87
Bhatinda-Jammu-Srinagar NA 26.75 66.87
Mallavaram-Bhopal-Bhilwara-Vijaipur GSPL India Transco Limited NA 26.75 66.87

For consumers located away from the natural gas sources, a significant portion of the natural gas cost comprises the transmission tariff due to higher approved tariffs and additive nature of the transmission tariffs. With the implementation of the Unified Tariff regime, anomalies in the final consumer prices will reduce significantly. Accordingly, the new tariff regulations would aid the economics of CGD entities for GAs distant from the west coast due to lower pipeline tariff, especially for the PNG industrial and commercial segments.

Additionally, the Union Budget 2021-22 underscores the move towards a gas-based economy as it plans for CGD to be rolled out across 100 additional districts over the next three years and plans an independent gas transport system operator for facilitating and coordinating the booking of common carrier capacity in all-natural gas pipelines on a non-discriminatory, open access basis.

Notwithstanding the regulatory interventions, several other steps are still required to be implemented. Some of the reforms that have been long pending include the inclusion of natural gas under the Goods and Services Tax, development of an integrated pipeline network, unbundling of the marketing and transmission, and development of an integrated gas trading hub/exchange. Additionally, the pace of approvals for the CGD projects remains slow and despite recommendations by the PNGRB, states are yet to provide a regulatory push such as lower road tax on CNG/liquefied natural gas vehicles, a single window clearance for approvals and lowering of road-cutting charges.

By Mr Prashant Vasisht

Mr Prashant Vasisht is vice-president and co-head, corporate rating at ICRA Limited. He has been associated with ICRA for more than 11 years. He is a rating committee member besides which he and his team handle rating assignments for the oil and gas, fertiliser, petrochemical and chemical sectors. He is also responsible for quarterly industry research reports for oil and gas, chemicals and petrochemicals sectors and has authored several thematic notes on upstream exploration and production, oil refining, chemicals, petrochemicals, city gas distribution and commodity polymers sectors. Mr Vasisht is a chemical engineer from the Punjab University and an MBA from IIM Calcutta. Prior to working with ICRA, he has worked with Engineers India Limited and UOP India Private Limited (a Honeywell company).