Government will have to take reformative measures to accelerate the project implementation for gas distribution

H P Singh
Executive Director, Sanwariya Gas Ltd (SGL )
According to the 'Vision 2030 - Natural gas Infrastructure in India' report by PNGRB, demand of CGD in India is expected to reach 85.61 MMSCMD from 15 .30 MMSCMD in 2012-13. Sanwariya Gas Ltd, one of the private CGD players in India, successfully commissioned Mathura City Gas Distribution Network with a team of experts and is now bidding for projects in other cities. H P Singh , Executive Director, Sanwariya Gas Ltd (SGL), shared his views on the business nitty-gritties and future plans of the organisation, in an exclusive interaction with Offshore World.

Historically, the business of gas distribution has been dominated by the public sector companies in India. What are the challenges for the private players to operate in this space?
I do agree with you that while Indian PSUs continue to enjoy the larger share of the CGD business at present, the opportunities in this sector have encouraged many private players to venture into the business of gas distribution despite numerous challenges. In my view, the challenges can be categorised into two critical areas which include building pipeline infrastructure and pricing of gas. PSUs like GAIL and other companies in the business of retailing already have established infrastructure across the country with surplus funds to expand further connectivity. Moreover, PSUs also get support from the Government as far as projects or even gas allocation is concerned. Unfortunately, this is not the case with private players who have to invest in developing the infrastructure and also wait at times to ensure gas supplies to run the projects.

What are the key infrastructure challenges?
In my view, seeking permissions and funding of the project are two bones of contention.

The government has taken noble initiative to reach natural gas supplies for domestic consumption to as many people as possible, which requires building proper pipeline networks across new cities as well as maintaining the existing ones with old infrastructure. Such projects mandate us to coordinate with almost seven to eight different departments for clearances such as environment and forests, pollution control board, fire and safety, municipality, water and telecom, etc to ensure that the existing distribution networks are not affected. Unfortunately, we do not have a single-window clearance system for project clearances to enable fast project execution. Plus, we need to be ready for surprise disruptions that are caused by local Corporators which sometimes disrupt the work, thus causing project delays.

Securing funds for the projects is another major hurdle since at times it becomes very difficult to explain the CGD project to an investment firm or bank as to how the money is utilised in the project as the pipeline infrastructure is spread below the ground. According to rough estimates, cost of installing 1 km pipeline comes to approx. Rs 2 crore for the CGD project and also varies from city to city. For example; SGL have invested almost Rs 200 crores for Mathura city gas distribution project out of which 60 percent of the fund was invested for laying pipeline which is under the land.

Another factor is infrastructure development cost for laying pipeline for residential areas in cities and metro compared to its cost in B-class cities like Mathura but the selling price of gas to domestic residents is same in both regions, which has a direct impact on profit margins for City Gas Distribution Companies operating in these regions respectively.

You referred to pricing as the second broad category of challenges. Can you please talk a bit more about that?
There are only two points that one needs to understand when it comes to pricing of Gas. First is the buying price of gas from the LNG supplier and second is the cost to consumer in any business. For us, the customers belong to one of the four sectors that are: transportation, domestic gas, industry and commercial applications.

We have to secure long term LNG supplies from suppliers like GAIL for which we enter contracts for 2-3 years which have their own pros and cons. On one hand these contracts ensure uninterrupted gas supplies but on the other hand it prevents us from taking advantage of the decline in gas prices, which is happening currently in the LNG spot market. Hopefully in the next one or two years, once the contracts are over and if current market scenario continues to prevail, we will be able to optimise our cost of sourcing and pass the benefit even to the customers.

Presently there is no uniformity in value added tax (VAT) structure which varies across the states from 5 per cent in Haryana to 26 per cent in Uttar Pradesh and there is no VAT in Delhi which makes a lot of difference in cost to the consumer. Customers pay between Rs 39/kg in Delhi to Rs44/kg in Noida and Rs 54/kg in Mathura, which is not fair. In fact, we have been lobbying with the Government of Uttar Pradesh to reduce or waive off the VAT to make usage of natural gas more viable for the customers of Uttar Pradesh.

Can you please share the hiccups Sanwariya Gas faced in receiving gas supplies based on administered price mechanism (APM) price allocation?
During the regime of the last Government, it was decided to allocate gas based on APM to CGD players, both from the public sector and private undertakings. While the PSUs continued to get supplies from the Government, we were not given any supplies even after our unit was commissioned in the October 2011. Our detailed feasibility report (DFR) was prepared taking APM as the base. It was only after the verdict of Hon’ble High Court of Gujarat which stated gas as the national property and that any entity in the business could not be discriminated on the basis of state or capital or on basis of Government or Private entity. Pursuant to this verdict supply of APM Gas commenced in January 2014. During the period when we were not receiving any supplies, we incurred heavy losses as we had to forcefully purchase RLNG which is almost 4 times expensive than Natural Gas, but we are hopeful to recover the price in the next one or two years. Tell us about the some of the ongoing projects and future plans of company.

Sanwariya Group ranks nineteenth in CGD business in India. We have commissioned Mathura Gas distribution network at the cost of Rs 200 crores. The network includes four CNG stations which are already operational and upcoming two more which will be operational from the month of August, 2015. We have established the network for supplying domestic gas to 30,000 houses in the city and are trying to expand it. Right now, around 3500 households taking gas from us. We target to set up a network of eleven CNG stations in Mathura by March 2016. As I have already mentioned, we have submitted bids for three more cities and intend to expand the network in three to five cities over the next few years.

Internationally, we had carried out studies for the project in Egypt but are not going ahead because of prevailing political crisis. We are trying to focus on the Middle East market and have opened a facility in Dubai. One of the major international projects is to develop Gas Distribution network in Ghana, which is our forte. We are also exploring the potential in Brazil to enter the South American market.

What kind of opportunities exists for the private players in CGD in India according to you and expectations from Government?
At present there are a total of 21 players in CGD in India. This is a huge market and opportunities do exist. PNGRB has been inviting bids for setting up CGD networks in several cities and we have recently submitted bids for three cities outside Uttar Pradesh. However, the Government will have to take reformative measures at the Central as well as State levels to accelerate the project implementation and set up proper mechanisms for gas distribution, address the grievances like tax structure disparity, etc to encourage more companies to come forward and invest.

For me and most of CGD players, the issue that needs to be taken as the topmost priority is non-uniformity in tax structure across different states in order to encourage investments in this area. Recently, Deputy Chief Minister of Delhi, Manish Sisodia called a meeting of Finance Ministers of five states of Delhi, Haryana, UP, Rajasthan and Uttarakhand to discuss uniformity in policy on petroleum products as the five states are interconnected to each other by borders. These discussions are in the nascent stage right now and though all the states principally agreed to work in this direction, nothing is finalised yet. Second is single window clearance for faster project execution. We are just being optimistic and waiting for the final outcome.