How To Secure Gas Supplies For The Cgd Sector

Transcription

1 City Gas Distribution in India Key Trends and Outlook 5 th Annual Conference 9 th March 2010

2 Presentation Outline Key Market Drivers and Developments Gas Supplies Infrastructure CGD Business Economics Key Discussion Points Policy Regulations 2.

3 Domestic discoveries and LNG sources provide a strong impetus to CGD development Supply Projections MMSCMD FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Existing Fields New Domestic Fields CBM New Gas Finds LNG Traditional sources of supply (APM gas) are declining Fields discovered in early NELP rounds have started production and some more expected to start in the medium term CBM fields to add to regional gas supplies 3. Greenfield LNG import terminals as well as expansion plans of existing LNG terminals are proposed

4 however it is important to secure supplies for the CGD sector Domestic Supplies As per the Gas utilization policy, CGD sector is prioritized after fertilizer, petroleum and power projects Allocation from RIL s KG-D6 field is 5 MMSCMD for domestic and CNG segments and additional of 2 MMSCMD on a fallback basis, for industrial & commercial segments Many power plants are being planned in expectation of additional natural gas supplies Demand of a city is relatively small with a slow build up phase, making it unattractive from the perspective of volumes RLNG Supplies Significant LNG import capacity exists/planned, but securing volumes for a sustainable CGD business could be an issue Though supplies have increased, securing gas could be a challenge for the CGD sector 4.

5 New gas supplies have stimulated gas transmission development Current Future New pipelines to connect new demand centers bidding initiated National Gas Grid to integrate sources with demand centers Gas Highways (under NGHDAI) being proposed to increase connectivity 5.

6 Regulations to have a significant bearing on investment flow in infrastructure PNGRB Act Enacted CGD regulations notified by PNGRB Pipeline regulations notified Potential refinements in regulations More Cities GOI notified the Board and the Act PNGRB published EOIs for more than 60 cities and commenced bidding process for identified cities 6.

7 PNGRB has shown a proactive approach to ensure rapid development Board has: Shown commitment to the spirit of the PNGRB Act Shown keenness to move with speed Adopted a consultative approach Laid emphasis on transparency Shown preference to less intrusive regulation Signaled independence 7.

8 A number cities bid out and a number of CGD projects are under implementation GGL - SONIPAT CHANDIGARH GHAZIABAD GAEL- Faridabad IGL CUGL Agra & Lucknow GGL- MEERUT DSM - MATHURA GGCL- Surat, Ank, Bharuch Sabarmati Gas VMSS Baroda GAEL A bad & Baroda GGL- Kota MNGL- Pune GGL- Dewas AGL M.P Shahdol Allahabad & Jhansi Green Gas- Kanpur & Bareilly Bokaro TNGCL - TRIPURA MGL- Mumbai YANAM BGL KAKINADA BGL VIJAYWADA RAJMUNDRI BGL HYDERABAD UNDER IMPLEMENTATION CGD BIDDING - PNGRB PNGRB has published EOIs for more than 60 cities IMPLEMENTED 8.

9 however recently the authorization power of PNGRB has been contested leading to a temporary pause High court order implies that PNGRB needs to secure powers for authorization. Steps are being taken to ensure that pace of development of infrastructure is not reduced. The recent bidding rounds have evoked an interest in the investor community and also among some companies not in the CGD business. Many projects have been planned so that regions across India are covered in the next 5-10 years. An empowered regulator could facilitate faster development of the infrastructure in CGD. 9.

10 Regulations have been conceptualized considering many parameters Level playing field to non-energy sector players Flexibility of entering into technical tie-ups likely to allow entry of non-energy sector entities into the CGD space Intention to have serious bidders with thorough workings Benefits to new entity (Exclusivity) Time allowed by PNGRB for bid submission to allow entities to do a thorough working before submission of bids (having 25 year validity) Five year marketing exclusivity for new cities to encourage faster network penetration with a view to capture maximum customer base and enjoy commodity margins Benefits to consumer (Open Access) Open access of the distribution network after the exclusivity period to allow competition and choice to consumer CGD Regulations encourage faster network coverage with benefits to both CGD entity and end- consumers 10.

11 However recent bids show significant variation in the biddable parameters suggesting a Need to Rethink NETWORK TARIFF 400 B1 B2 B3 300 COMPRESSION CHARGE B1 B2 B3 Rs/MMBtu Rs/Kg Year 1 Year 3 Year 5 Year 7 Year 9 Year 11 Year 13 Year 15 Year 17 Year 19 Year 21 Year 23 Year 25 0 Year 1 Year 3 Year 5 Year 7 Year 9 Year 11 Year 13 Year 15 Year 17 Year 19 Year 21 Year 23 Year 25 INCH KM B1 B2 B3 NOS. OF OF DOMESTIC CONSUMERS B1 B2 B Year 1 Year 2 Year 3 Year 4 Year 5 0 Year 1 Year 2 Year 3 Year 4 Year 5 11.

12 Rethinking may be required on several counts such as Regulation s Intention To provide consumers lowest possible network tariff & compression charge. This would eventually reduce the delivered price to customer Question? Will lowest tariff hamper future network expansion plans? Should low/zero tariff be encouraged? Regulation s Intention Faster penetration of distribution network and reach to all segments of consumers Question? Is there some assumption made in respect of monitoring mechanism? Recent bids and authorization process have raised questions on efficacy of regulations. However, it should be appreciated that regulation evolves over a period of time and a healthy debate among the stakeholders would assist the evolution process to be faster. 12.

13 Some rethinking on policy front could make the CGD segment more attractive (Report of the Expert Group) Domestic Segment - LPG Prices to be increased by at-least Rs 100 Prices to be periodically revised based on increase in paying capacity CNG Segment Petrol and Diesel Prices to be market determined both at the Refinery gate and Retail level Reduced subsidization in pricing of alternative fuels will further enhance business economics of CGD entities 13.

14 Climate change related initiatives to further boost market attractiveness of CGD business India s target on reducing carbon intensity Days before the Copenhagen Summit India had declared a target of reducing amount of CO 2 emissions per unit of GDP by 20-25% between 2005 and 2020 This should lead to greater emphasis on natural gas, which produces for the same amount of heat lesser CO 2 relative to liquid fuels (30% lesser) and coal (45% lesser) Methane-to-Market (M2M) initiative Goal of promoting recovery and usage of methane from coal mines, landfills, oil and gas fields, etc Potential to reduce net methane emissions by up to 50 MMTPA of carbon equivalent by 2015 and continue at that level or higher in the future 14.

15 Going forward, some concerns of the stakeholders would need to be addressed (1/2) Players Will sector be able to secure gas supplies? Will the PSU domination in bidding continue? Will aggressive bidding be allowed? Would pricing reform for alternative fuels be implemented? Consumers If a license is issued for a city does it mean that consumers will get connected as envisaged? What if the selected entity is weak or underperforming? 15.

16 Going forward, some concerns of the stakeholders would need to be addressed (2/2) Investors Will the CGD business economics continue to remain attractive? How will the business risks change? What type of new players would be interested in the CGD business? Regulator How should the bid process change taking into account the experience from the past bidding rounds? Will all the required powers be vested in PNGRB to enable it function effectively? 16.

17 To summarize Improved availability of domestic gas supplies but securing supplies would be important Gas Supplies Gas Supplies Significant infrastructure projects planned to cover the key regions of country Infrastructure Government initiatives on climate change, pricing of alternative fuels are all supportive of CGD market development Policy CGD Business Economics Regulations First ever competitive bidding of CGD in the country. Learnings and need for rethink Healthy debate required for further evolution of regulations. 17.

18 CRISIL Risk and Infrastructure Solutions Limited A Subsidiary of CRISIL Limited 18.

19 Though CGD business looks profitable but underlying risks needs to be appreciated 35 Margins of various segments Delivered Price of Gas Alternate Fuel Prices High margin segment doesn t offer good volume intensity High Bulk $/MMBtu Volume intensity Industrial Retail Commercial 5 0 Industrial Domestic CNG Commercial Low CNG Domestic Weighted Average Cost of Gas + Network charge Margins Commodity Infrastructure Discount to Alternate Fuel Low Profitability High A typical CGD networks costs around Rs Crores to service volumes of a level of around 1.5 MMSCMD. The build-up of volumes is quite slow and customer penetration of a reasonable level of 50-60% is achieved only after 9-10 years. 19. Long gestation period coupled with low volume off-take can adversely impact the CGD business.

20 Returns of CGD business is a function of margins on commodity, infrastructure and overall volumes Profitability Margins Commodity Margins Infrastructure Pricing [Alternate Fuels] Commodity Costs Asset Utilization Operational Costs External Factors Crude Prices Regulations Policy Issues Demand-Supply dynamics Demand Volumes Supply of Commodity 20. There are significant external factors such as crude prices, regulations / policies that can impact the overall returns

21 Implementation of City Gas Distribution - Benefits to all stakeholders Benefits to Consumers Industrial consumers Continuous supply Low inventory cost Increased operational efficiency Domestic and commercial customers Cleaner fuel More convenient fuel alternative indoors Transportation Reduces emissions Higher safety in combustion (higher flash point) Quieter operation (less vibration and less odour than diesel) Benefits to Government Reduction of import dependence as NG replaces FO, LPG and Diesel Reach of LPG cylinders in rural areas Feel good factor convenience, savings Benefits to Society Better environment as adoption of NG significantly reduces the CO2 emissions Benefits to Upstream entities Higher realization at retail level compared to bulk sales acts as an incentive for gas suppliers 21. The returns of CGD business is not only limited to the CGD entity but benefits all the stakeholders