Tough targets, fuel crunch present double whammy for gas distribution firms

It is a tough time now to be a city gas distribution (CGD) company in India. On the one hand, there are the ambitious, even extravagant, minimum work commitments — to provide domestic piped gas connections and set up CNG stations — made by CGD companies to gas regulator Petroleum and Natural Gas Regulatory Board (PNGRB), especially for areas won in the 9th, 10th and 11th bidding rounds.

Failure to meet these commitments invites heavy penalties. For not meeting household connection targets, the penalty is ₹750 per house and it is ₹20 lakh for every CNG station committed but not set up.

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On the other hand, there is an acute and growing shortage of domestic natural gas as demand keeps rising while production continues to lag. India now imports some 55% of its natural gas as LNG. CGD companies sell most of this regasified LNG to their industrial and commercial piped gas customers, but a portion is blended with domestic gas for sale to households and as CNG.

Ukraine war impact

Matters were fine till Russia’s February 24 invasion of Ukraine and the resultant US and EU sanctions against Russia, a major exporter of natural gas. Global spot LNG prices, which were around $20/mmbtu before the invasion, have now doubled and are expected to remain high in line with winter demand from Europe.

Spot LNG cargoes account for about 40% of Indian imports and domestic importers stayed away from the market as spot prices surged. But what hurt India the most was Russian gas giant Gazprom defaulting on its contracted long-term LNG supplies to GAIL, ostensibly due to the sanctions but most likely because it’s lucrative to sell at more than double the GAIL contract price to European buyers. India has long-term LNG purchase contracts with Qatar, the US and Australia, and these supplies continue unhindered.

Making matters worse is the Oil Ministry’s CGD policy flip-flops. This May, the ministry gave GAIL the monopoly of supplying gas – domestic gas pooled with LNG – to CGD companies. 

With GAIL already short of long-term LNG cargoes because of the Gazprom default, it pooled (high priced) spot LNG with domestic gas, pushing up the Uniform Basic Price (UBP) for the CGD sector from $8.10/mmbtu in June to $8.90/mmbtu in July and to a record high $10.52/mmbtu for August.

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Note that the August UBP of 10.52/mmbtu calculated by GAIL and the ministry is nearly double the $6.10/mmbtu price of domestic gas, revised by the ministry every six months, and valid till September 30. Naturally, CGD companies sharply raised gas prices from August 1 for households and CNG customers.

Ironically, CNG prices came on par with and, in some cities, were more than the prices of diesel, the fuel it is meant to replace and against which it has typically been at least 20% cheaper.

Worse, projections were that the UBP would continue to increase, reaching $15/mmbtu in October, posing an existential crisis for the nascent CGD sector.

Policy flip-flop

Following an outcry, this ill-conceived May 2022 policy was replaced on August 10 with a new policy which said GAIL will no longer pool LNG with domestic gas for the CGD sector. CGD companies were told they would get 94% of their gas demand of the previous quarter. But this new, arbitrarily set allocation is valid only for FY 2022-23 second quarter, which ends on September 30, leaving the CGD sector wondering what policy will come in after that.

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Such policy flip-flops inspire no confidence amongst investors in the CGD sector. They also cast doubts on whether the government will be able to meet its target of raising the share of gas in the domestic basket of fuels from 6% now to 15% by 2030, over more polluting fuels such as coal and liquid hydrocarbons.

Even though the latest policy does away with the mandatory pooling of LNG with domestic gas by GAIL for supplies to the CGD sector, LNG imports will be inevitable because the policy says CGD companies should make up the shortfall (between demand and government allocation) from the market. So, high retail gas prices are here to stay, at least till global LNG prices cool down – which seems a remote possibility.

Granted, the government had no control over the external factors that pushed up global LNG prices to the present record highs. But it certainly could have followed up on its July 2014 policy granting the highest priority to the CGD sector for the allocation of scarce domestic gas. Till then, the CGD sector ranked fourth, after urea factories, LPG processors and power stations for domestic gas allocation.

After this announcement, logically, the CGD sector should have got most of the gas from domestic fields. But the reality is just the opposite. Some 65 million cubic metres/day gas is produced from domestic fields but the CGD sector now gets just a little more than 20 million cubic metres/day of this. A good chunk of this gas goes to urea factories, power stations and even to factories around the Taj Mahal in Agra.

What is the way out? In line with the most favoured status granted eight years ago to the CGD sector, only after the CGD sector demand is fully met should domestic gas be allocated to other sectors. This will exclude the need for expensive LNG for this sector and, importantly, will provide comfort to investors who have, so far, pumped in some ₹25,000 crore into this sector, in areas won in up to the 10th CGD bidding round.

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If, instead, the present muddled, arbitrary and confusing policies continue, expect these investments to turn into NPAs very soon. And official claims such as ₹200,000 crore investments, 20 million domestic gas connections (from the present 7.5 million connections) and 10,000 CNG stations (from the present nearly 4,000 CNG stations) by 2027, will remain just pipedreams.

(Madhu Nainan is based in Mumbai and is editor of the newsletter ‘Petrowatch’. He has worked with several newspapers and news agency AFP.) 

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