Growing urbanization in India is expected to result in massive increase in India’s energy consumption. Primary energy consumption is expected to expand by 1.2 billion tonnes of oil equivalent by 2040[1], making India by far the largest source of energy demand growth.  Aligning to India’s burgeoning energy need, Government of India is focusing on four pillars of energy in future – Energy Security, Access, Efficiency and Sustainability.

Government of India had laid out ambitious plans to alter the primary energy mix of the country by increasing the consumption of natural gas from 6.2% in 2020 to 15% by 2030. This is primarily through focus on decarbonization of the economy and pushing the pollution levels down by 33% compared to 2005 levels by 2030[2]. With a view to expand the reach and to enhance the uptake of natural gas in the country, the Government of India had introduced a series of reforms. As a result of these reforms, the CGD sector is getting major impetus, overcoming the tepid growth till 2018. The Petroleum and Natural Gas Regulatory Board (PNGRB) has stepped up the bid processes for new Geographical Areas (GA). Till the 8th bidding round, a total of 92 geographical areas (including 30 pre-PNGRB authorizations) were authorized, covering around 20% of the country’s population and 11% of the total geographical area. Since 2018, in the 9th and 10th round, licenses were awarded for 136 geographical areas increasing the total coverage of population to around 71% and 53% of the total geographical area of the country – perhaps largest auction process in the infrastructure sector in the world in recent times.

Source: PNGRB

The 9th and 10th round of bidding witnessed an unprecedented commitment of investment of around Rs. 1.2 lakh crores. With the completion of committed infrastructure, natural gas would be available to around 5 crore households in the country.  In addition, the Compressed Natural Gas (CNG) infrastructure is expected to grow fivefold enabling a steady shift of liquid fuel driven vehicles to Natural Gas vehicles (NGVs).

Current state of CGD Sector

The CGD sector presently accounts for around 12% of the total natural gas consumption in the country[1]. The CGD business is divided into four broad segments – industrial, commercial, domestic and transport. As on March 2020, around 12,000 industries, 30,600 commercial establishments and 60.70 lakhs households were connected to piped natural gas supply. In addition, there are around 2,207 CNG stations (gas retail outlets) supplying CNG to natural gas vehicles across India. In the CGD companies such as Indraprastha Gas Limited, Mahanagar Gas Limited and Adani Gas Limited, CNG segment contributes to over 60%-75% of their overall gas sales, whereas in Gujarat Gas Limited, the industrial segment contributes to the over 70% of their overall gas sales.[2] The total volume of natural gas consumed in the CGD sector has increased at a CAGR of around 14.3% from 14.8 MMSCMD in 2014-15 to 25.3 MMSCMD in 2018-19.
Source: PNG Statistics – MoPNG

The COVID pandemic had significant impact on the volume off take in the CGD sector. The restriction on movement of commercial vehicles and the shutting down of small industries had led to volume drop of over 75% in the CGD sector during March to May 2020.[1]   The volumes have started picking up gradually, however it will take over a year before the volume reaches to the earlier levels.

Key Economic Drivers

Each of the four segments in the CGD sectors – Industrial, commercial, domestic and CNG are supported by predominant economic factors:

  • Piped natural gas to domestic consumers and CNG for Vehicles – Both the segments have been accorded top priority in the allocation of domestic gas. The minimum work program obligation to the developer and the central government’s push to minimize subsidy on LPG in order to control LPG imports are some of the factors driving these segments. High profit margins in the CNG segment makes this segment lucrative and is a key focus area for CGD entities across the country.
  • Industrial and commercial segments – Natural gas supplied to industrial and commercial consumers is through RLNG sources as these segments don’t have the allocation of domestically produced natural gas. Conversion to natural gas is driven mostly by cost economics. With the recent ban of polluting fuels such as pet-coke and fuel oil across the country by National Green Tribunal (NGT), the industrial segment is expected to witness demand for natural gas in the industrial segment.

 Key Policy Drivers

The series of initiatives taken by the Government of India have helped the sector grow and provide incentives for further investments:

  • Marketing exclusivity for a period of eight years extendable up to two years with successful completion of minimum work program will encourage the operator to develop infrastructure and commission domestic gas connections at the earliest to avail the benefits of extend marketing monopoly for additional two years.
  • Development of pipeline infrastructure in the eastern and north eastern part of the country through viability gap funding for the Urja Ganga and North Eastern Gas Grid pipeline project will help in expediting the development of CGD in Uttar Pradesh, Bihar, Jharkhand, Orissa, West Bengal and North Eastern States.
  • The newly launched gas trading hub is expected to aid opening of gas markets through a transparent trading mechanism. This would also lead to more economic procurement options for the CGD entities in the future.
  • In order to control pollution in the Delhi NCR region, in 2017, Supreme Court ordered a ban on the use of pet-coke and fuel oil as fuels for energy generations in the NCR region, and suggested that similar steps be taken in other states. On the similar lines NGT has banned the usage of coal gasifiers in the ceramic industry in Gujarat which lead to a major fuel shift to natural gas in the ceramics production. Similar policy interventions have been extend to the entire country which will help drive adoption of natural gas.

 Sector Challenges

The sector however faces challenges on multiple aspects across the entire value chain. Starting from project financing to maintenance of CGD network post completion.

Project set-up: In the initial stages of project life cycle, monitoring of Capex flow, adherence to project timelines, obtaining timely permissions, asset management, vendor management and availability of adequate skilled manpower are some of the challenges that the CGD entities are facing currently.

Business Operations: Post completion of the pipeline construction, lack of vendors and skilled manpower for areas related to pipeline monitoring, leak identification, gas meter inspection and reading in the steel and MDPE network are impacting margins of the CGD entities. On the CNG front, investment decision and prioritization for setting up of CNG stations and ensuring efficient operations of mother and daughter booster station are some of critical challenges that needs to be addressed by the CGD entities to enhance faster conversion of vehicles on one hand and driving maximum value from the limited capital on the other.

Way Forward for the CGD Sector in India

  • Natural gas Demand: The natural gas consumption in the CGD sector is expected to increase up to 85.6 MMSCMD by 2029-30[2]. The key factor that decides the energy consumption levels in the CGD sector primarily depends on economics vis-à-vis the alternate fuels. Domestically produced gas being available at a lower price, along with low international prices of LNG supported by the increasing pressure on reducing the country’s carbon footprint may aide in increasing the use of natural gas in the country.
  • Policy Interventions: Government of India had issued a draft CGD policy which aims at easing the process and reducing the time for various permissions for laying of the CGD infrastructure. Tariff rationalization could expedite the sector growth in the long term. Government interventions in reducing the time for various state and central permissions would also expedite the development of infrastructure layout.
  • Technology Interventions: Several challenges in the CGD sector could be resolved with the help of technology solutions. Some of the upcoming technologies in the sector include analytics based tools for better demand estimations and gas reconciliation, geo-tagging tools for better visibility of assets, centralized monitoring tools for network pressure operations and leak identification, real time data driven analytics tools for optimizing CNG transport vehicle network, smart metering technologies, SCADA and ERP systems for creating a smart data driven maintenance, mobile applications for easing customer billing and query management, etc. In the next 10 years, the CGD infrastructure could see a major shift towards smart gas grids where the end-to-end operations and decision making will be data enabled. The future gas grids will be self-healing networks with superior network control, integrated multi-geographical area operations modules, real time grid communications, predictive demand forecasting and automation in most of the processes. The paradigm shift from physical process to automation or digitization has been catalyzed by the recent virus outbreak.
  • Investment Opportunities in Equipment Space: With high injection of investment commitments, the equipment and spares market is expected to witness a boom in the demand. For equipment and spare manufacturers, it would be an ideal time to invest more in manufacturing equipment related to PNG and CNG like meters, regulators, pipes, online and booster compressors, dispensers, cascade and relevant spares. Local vendors may thrive with the help of CGD companies reducing the dependency of imported equipment and spares.
  • Growth Opportunities for Entities: The sector is expected to witness many new players in the markets owing to the growth prospects and investment opportunities. With the new players, multiple unique operational standards and practices may be seen which would create more dynamism and increase efficiencies across the sector. M&A activities are likely to pick up as the industry consolidates.

Overall, the CGD sector in India has bright prospects, not only with respect to increasing natural gas consumption in India, but also providing the opportunity to transform the way energy is consumed by the end consumers. Entities involved in infrastructure development for CGD have a huge responsibility to deliver on commitments and making the ambition a grand success, while capitalizing on a sustainable and profitable business in the long term. The road to a gas based economy, hitherto planned on the basis of power generation and industrial demand may find wind on its sails through CGD.

By Anish De and Nikhil Moghe

Anish De is partner and national head, energy and natural resources, and head, strategy and operations, infrastructure government and healthcare (IGH), at KPMG in India. He specialises in energy market design, regulation, energy trading, renewable energy, fuels, transactions, etc. He consults for a number of entities in the oil and gas sector including Indian Oil, HPCL, BPCL, GAIL, Adani Group, CLP, Ministry of Petroleum & Natural Gas (MoPNG) and the Petroleum and Natural Gas Regulatory Board (PNGRB).

 Nikhil Moghe is Partner with KPMG in India. He specializes in policy & regulatory advisory, business transformation, feasibility studies, commodity sourcing, contracting and pricing, energy trading etc. He has worked extensively with stakeholders in the Oil & Gas industry, engaging with both national and international clients. Some of the key clients include MoPNG, PNGRB, IOCL, BPCL, HPCL, ONGC, GAIL, Adani, Shell, ENGIE etc.

1BP Energy Outlook
2 IEA 2020 India Report
3 PNG Statistics -MoPNG
4KPMG research and industry research
5 KPMG research and industry reports