The Indian economy is projected to grow at 7.5 per cent, 7.9 per cent and 8.0 per cent in each year from 2015 to 2017, according to the World Bank’s Global Economics Prospects report. India was the third largest economy in the world in 2013 by purchasing power parity and also had the second-largest population in the world at almost 1.27 billion people in 2014, having grown approximately 1.3 per cent each year since 2008.
In 2014, India was the fourth-largest energy consumer in the world after China, USA and Russia, whose need for energy continues to rise as a result of the country’s economic growth and modernisation over the past several years.
Primary energy consumption in India has more than doubled between 1990 and 2012, reaching an estimated 32 quadrillion Btu. Natural gas production in fiscal year 2014 was approximately 97 million standard cubic metres per day (MMSCMD) by ONGC, oil, non-state-owned and joint venture companies.
The share of offshore natural gas production in fiscal year 2014 was approximately 74.5 per cent.
Domestic natural gas production is likely to increase over the medium to long-term
following the commencement of production from Gujarat State Petroleum Corporation Limited’s Deen Dayal block, ONGC’s KG basin blocks and modest increases in RIL-BP JV's KG D-6 production.
With the proposed premium for deep water blocks, ICRA Research projects domestic natural gas production from existing or discovered gas fields to increase from 93 MMSCMD in fiscal year 2015 to approximately 114 MMSCMD by fiscal year 2018, which could further increase to approximately 162 MMSCMD by fiscal year 2025, notwithstanding the fall in production from existing fields.
In the last decade, demand for natural gas in India has increased due to its increased availability, the development of natural gas transmission and distribution infrastructure and the environment-friendly characteristics of natural gas as a fuel source. Natural gas consumption grew at a CAGR of 3.7 per cent over the five years to 144 MMSCMD in fiscal year 2014 from 120 MMSCMD in fiscal year 2009, driven by growth in consumption from sectors such as power, fertilisers and City Gas
LNG has become an important part of India’s energy portfolio since the country began importing it from Qatar in 2004. In 2013, India was the world’s fourth-largest LNG importer, importing 639 Bcf, or six per cent of global trade. ICRA believes that the potential gas deficit (price unconstrained) will decrease from approximately 117 MMSCMD in fiscal year 2015 to approximately 74 MMSCMD by fiscal year 2021 in line with improvement in domestic gas supply and the commencement of LNG supplies from long-term LNG contracts.
The deficit could marginally increase to approximately 87 MMSCMD by fiscal year 2025 reflecting the need for more long-term and spot LNG contracts to meet the deficit.By the end of fiscal year 2014, India had a natural gas pipeline network length of 14,988 kms with capacity of 401 MMSCMD spread over 15 states and Union Territories. GAIL is one of the leading companies in the market and owns approximately 73 per cent of the existing pipeline network.
MoPNG is contemplating developing a national gas grid having multiple points of supply and delivery. The proposed grid would connect the natural gas sources to major demand major centres in India and the network is expected to expand to approximately 28,000 kms of pipelines with a total design capacity of approximately 721 MMSCMD over the next five to six years.
Natural gas supplied through the CGD network has varied uses. It can be used as CNG in vehicles, as an alternative to petrol, diesel and LPG. Piped Natural gas (PNG) can be used as a domestic cooking fuel, in place of LPG. PNG can also be used to substitute commercial LPG and fuel oil, LSHS, LDO and bulk LPG in commercial and industrial establishments respectively.
There are 20 entities including JV companies operating in 36 geographical areas (GA). PNGRB has authorised 54 Gas in total, in which operations are yet to commence in 18 Gas. The PNGRB has envisaged a rollout plan of CGD network development through competitive bidding in more than 300 possible geographical areas (GAs) in a phased manner. While the actual rollout has been delayed due to lack of connectivity and supply constraints, with the government assuring domestic gas supplies for GCD entities (CNG and domestic PNG), CRISIL expects new CGD projects to be awarded and developed over the next three years.
The PNGRB has bid out 34 GAs in the sixth round of CGD bidding and 106 GAs have further
been identified by PNGRB for subsequent bidding rounds, subject to natural gas pipeline connectivity. PNGRB’s bidding rounds could be a large opportunity for growth with 11 GAs in Maharashtra and 60 GAs in rest of the country offering multiple opportunities to Mahanagar Gas Limited for expansion beyond Mumbai.
The GAs in Maharashtra comprise Ahmednagar, Latur, Osmanabad, Ratnagiri, Nagpur, Solapur, Kolhapur, Satara, Chandrapur, Gadchiroli and Wardha. As per the prevailing bidding rules, the PNGRB determines the minimum work programme considering population and area of the GA and notifies the same while offering the GAs for bidding. The minimum work programme comprises of domestic connections and pipeline to be laid over the first five years of the licence period.
Meanwhile, Mahanagar Gas Limited – Mahanagar Gas Limited is promoted by GAIL and BG Asia Pacific Holdings Pte Limited (Part of Shell Group with HQ in Singapore) – has offered 2,46,94,500 equity shares at Rs 380 to Rs 421 per share for sale in Mumbai from June 21 to June 23, as part of its strategy to increase penetration in Mumbai and adjoining areas, develop infrastructure in existing areas, continue sourcing reliable and cost-effective natural gas from multiple vendors, and also opportunities for growth in new markets.
“We seek to enter into new markets while continuing to explore economically-viable opportunities in expanding our CGD business across India, and may consider value accretive acquisition of opportunities in new geographies to expand our reach,” said Rajeev Mathur, Managing Director, Mahanagar Gas Limited (MGL).
“In the last five fiscal years, we have set up 2 CGs, 43 CNG filling stations, laid down 114.33 kms of steel and 1,243 kms of PE pipeline, and added 0.35 million PNG customers. We intend to add over 675 kms of steel pipeline and PE pipeline and 83 CNG filling stations during the next five years in our areas of operations.
In order to diversify our portfolio of CNG filling stations, we intend to set up a higher number of CNG filling stations owned and operated by us and by pro-actively identifying land for setting up such CNG filling stations,” he said, adding “We have entered into spot framework agreements and letters of intent with several suppliers such as GAIL, HPCL, HLPL, GSPCL, BPCL, IOCL and PLL and BGIES for procurement of RLNG.”
Noting that CNG is cheaper than petrol and diesel, he said this market is underpenetrated with significant potential for expansion.
* Domestic gas produced from field awarded under different regimes such as Nomination, Pre-NELP and NELP are allocated as per the Gas Utilization Policy (GUP). As per the policy, domestic gas is allocated sector-wise in the order of priority as decided by the Government.
As per the extant policy, CGD (CNG and domestic PNG), fertiliser, power and LPG customers are classified as Priority Sector. According to recent media reports, the Central Government is considering a Unified Allocation Policy (UAP) applicable for all regimes, to eliminate anomalies and correct imperfections in the existing policies.
*In October 2014, the Indian Government approved a new gas pricing formula for domestic gas sales. As per the new formula, the price of natural gas would be the volume weighted average of gas prices at Henry Hub (USA), Alberta Gas Reference Point (Canada), National Balancing Point (UK) and the Russian domestic market.
Gas prices will be determined on a half-yearly (April and October) basis and based on trailing four quarter prices at these hubs, with one quarter lag. The Minister of Finance, in the fiscal year budget speech, made an important announcement on the development of PNG in a ‘mission’ mode. The government has initiated several measures to propel CGD sector growth in the country.
* CGD sales volumes are expected to rise approximately 22.4 MMSCMD in fiscal year 2017 from 20 MMSCMD in fiscal year 2014, according to a CRISIL Research report of December 2014. Sales volumes of both industrial and commercial segments have declined over the last two years due to failing competitiveness with alternative fuels and muted economic activity.
But total sales volumes are expected to increase from 2015-2016 and grow at approximately six per cent, led by fleet additions to public transport, private vehicle conversions and rising economic activity.
* Natural gas demand for CGD sector is expected to rise steadily due to addition of gas networks in new cities, price advantage of CNG and increased use of PNG in domestic, industrial and commercial sectors.
Given the priority allocation of domestic gas in CNG and PNG (domestic), thrust on domestic connections and development of CNG grid are likely to enable Priority sector to grow at a healthy rate. Industrial and commercial demand largely depends on the prevailing RLNG prices.
*According to CRISIL, demand for natural gas is expected to be driven by CNG and domestic PNG segments, while the demand from the industrial segment could remain low over the next three years. Additions to the public transport fleet in Delhi and Mumbai is expected to enable an 8 per cent CAGR growth in demand from the CNG segment over the next three years.
Further, assured domestic supply is expected to keep CNG prices competitive as compared to alternative fuels, which would support growth in CNG demand through the conversion of private vehicles from using oil-based fuel to gas-based fuel. Domestic demand for PNG is also expected to witness healthy growth, riding on the convenience factor.
* In terms of end-user segments, the share of demand from CNG segment is expected to increase to 41 per cent in 2016-2017 from 37 per cent in 2013-2014, while share of demand from the industrial and commercial segments is expected to decline from 52 per cent from 57 per cent over the same period.
In terms of areas, Delhi/NCR and Mumbai, which have a large base of CNG and domestic PNG customers, are expected to witness relatively stronger growth. However, companies in Gujarat, who cater primarily to industrial customers, are expected to experience low demand.
* The CGD market size in Mumbai is expected to increase to 2.8 MMSCMD in 2016-2017, from 2.26 MMSCMD in 2013-2014, a CAGR of approximately 7.5 per cent. in value terms, it is expected to increase to Rs 27 billion, from approximately Rs 19 billion, a CAGR of 12 per cent for the same period.
* The CGD volumes in Delhi/NCR are expected to increase to 4.3 MMSCMD in 2016-2017, from 3.8 MMSCMD in 2013-2014, recording a 4 per cent CAGR. While growth in demand is expected to remain muted in 2014-2015, it is expected to rise thereafter due to addition to the public transport fleet.
* Gujarat is the largest CGD market in India, accounting for approximately 39 per cent of total consumption. The CGD market size in Gujarat is expected to increase to 8 MMSCMD in 2016-2017, from 7.8 MMSCMD in 2013-2014.
However, in 2014-2015, demand is expected to decline by approximately seven per cent to 7.3 MMSCMD, due to muted industrial activity and poor competitiveness with alternative fuels, following a sharp fall in crude oil prices.
* CGD demand is poised for healthy growth over the long term because of favourable economics of CNG usages when compared with the alternative fuels, convenience in use of PNG (domestic) for households, and moderate outlook for PNG (industrial) and PNG (commercial) with the likely pickup in manufacturing sector growth in line with the anticipated GDP recovery.
The government plans – to set up approximately 15,000 kms of new gas transmission pipelines – would also aid expansion of the CGD into newer areas. It is however imperative that regulatory clarity emerges on the powers of PNGRB, for the orderly growth of the sector.