Grid development key to India’s natural gas market growth

By 2022, India plans for natural gas to make up 15% of its primary energy consumption, up from 6-7% currently. Achieving this goal depends on the availability of domestic natural gas, importing natural gas at competitive prices, development of adequate LNG infrastructure, and—to accommodate all of these—expansion of the natural gas pipeline network.

Underutilization of current gas pipelines is a bottleneck to both efficient operations and further expansion. Slow expansion in turn jeopardizes efficient construction and operation of LNG terminals.

India’s natural gas pipeline business is largely controlled by government companies GAIL (India) Ltd., Gujarat State Petronet Ltd. (GSPL), and Indian Oil Corp. Ltd. The only notable private player is Reliance Gas Transportation Infrastructure Ltd. (RGTIL). GAIL operates 11,092 km of pipeline, about 67% of the country’s total. It will also operate about 44.5% of the 13,489 km under construction.

GAIL operates the Hazira-Vijaipur-Jagdishpur (HVJ) pipeline, the main natural gas artery through the country. RGTIL built its East West Pipeline to move gas from Krishna Godavari Dhirubhai 6 (KG-D6) field in Andhra Pradesh to demand centers in Andhra Pradesh, Maharashtra, and Gujarat and tie-ins with GAIL’s and GSPL’s networks to reach northern and western India. GSPL focused on building a network in Gujarat, while Gujarat State Petroleum Corp. (GSPC) India Transco Ltd. is involved in building a gas pipeline network beyond Gujarat. Western, northern, and southern India have reasonable access to natural gas, but most of the country’s eastern states have yet to get pipelines.

Pipeline development

India has six major regional natural gas markets—Northern, Western, Central, Southern, Eastern, and Northeastern —out of which the Western and Northern have the highest consumption due to better pipeline connectivity. States closer to domestic gas sources, LNG terminals, and cross country natural gas pipelines also have access to gas, with states and union territories and states like Gujarat, Maharashtra, Andhra Pradesh, and the Delhi-National Capital Region having higher natural gas penetration than others. States like Tamil Nadu, Punjab, Haryana, Jharkhand, Uttarakhand, Karnataka, Kerala, West Bengal, Bihar, Chhattisgarh, Madhya Pradesh, and Odisha have limited connectivity. Increased pipeline coverage will help redress this imbalance.

Pipeline effects

Natural gas pipelines affect India’s industrial sector, gas-based transportation, socio-economic progress, and employment growth. Strong natural gas pipeline connectivity in Gujarat, Maharashtra, Haryana, and the Delhi-National Capital Region facilitated emergence of new industrial towns such as Himatnagar and Rajkot. Pipelines enabled rapid growth of compressed natural gas (CNG) as an alternative transportation fuel in India. Piped natural gas was also the perfect replacement for LPG for millions of households and the best alternative in poor rural and urban households for charcoal, wood, or other sources of cooking heat. These advances had follow-on effects which directly or indirectly have allowed for employment of millions of citizens.

Capacity utilization

Capacity utilization of natural gas pipelines is a big concern for operators. Low capacity utilization makes it difficult for operators to reach their desired return on investment. GAIL’s pipelines must operate at more than 70% of capacity to breakeven. Its network is expected to grow to more than 16,000 km by 2020.1 Natural gas pipeline operations statistics for April-September 2017 suggest that average capacity utilization was about 43% (Table 1), with most pipelines severely underused and their operators in financial distress.

India’s pipeline sector is not an attractive investment. The country’s fifth longest gas pipeline—from Dhabol, Maharashtra to Bangaluru, Karnataka—with a total capacity of 16 million standard cubic meters/day (MMscmd) and a distance of 1,097 km, operated at 7.9% of capacity. The East-West Pipeline, with India’s largest capacity (80 MMscmd), operated at 18.5%. The Dadri-Bawana-Nangal pipeline, passing through some of the country’s major industrial belts underperformed similarly at 18.6% capacity utilization.

Factors behind this operational inefficiency include the unavailability of domestic gas, the higher price of imported gas, and inadequate market development. Most of the pipelines were built under the premise of surging domestic gas supply. Supply disruptions in the upstream have severely affected the midstream and downstream. The economic viability of most of the underutilized pipelines is bleak. Operators looking to liquidate their positions are finding a very limited number of potential buyers.

Pipeline construction

Pipelines under construction total 13,489 km (Table 2) and are expected to boost economic activity in Southern, Eastern, and Western India. Availability of natural gas would boost fertilizer production, transportion, power generation, and industrial activity. These pipelines could also stimulate demand for natural gas by adding new customers. The 74.81-MMscfd Surat-Paradip pipeline2 was expected to facilitate growth of new industries and towns along its route—particularly in cities like Surat (Gujarat), Nagpur (Maharashtra), Raipur (Chhattisgarh), and Paradip (Odisha)—but was cancelled by India’s Petroleum and Natural Gas Regulatory Board (PNGRB) in March 2018.

Effective use of LNG regasification terminals requires pipeline connectivity to demand centers and consuming industries. Inadequate pipeline capacity from LNG terminals leads to their underutilization, placing a financial burden on developers. Lack of pipeline connectivity to Bangalore, Mangalore, Pallakad, Coimbatore, and Kozhikode (major demand centers) caused the average capacity utilization of Kochi LNG terminal to remain as low as 5.67% during 2016-17.3

On May 31, 2012, PNGRB granted GAIL authorization to lay, build, operate, and expand the Kochi-Koottanad-Bangalore-Mangalore (KKBM) natural gas pipeline with a designed capacity of 16 MMscmd, 4 MMscmd dedicated to common carrier use.

KKBM’s 1,104 km connect multiple demand centers in Kerala, Tamil Nadu, and Karnataka. The initial authorization required completion by March 2013. GAIL faced severe socio-political hurdles, leading to delays which forced PNGRB to extend the completion deadline to June 2015. GAIL missed this deadline as well.

Protests by farmers over laying the pipeline through farm land remain one of the biggest impediments to land acquisition. The Government of Tamil Nadu seems to support the farmers and has directed GAIL to “immediately give up…laying gas pipeline through agricultural lands,”4 prompting legal action. The Division Bench of the High Court of Madras on Nov. 25, 2013, overturned the state government’s order4 and directed GAIL to continue the project. The Madras High Court’s order was challenged in the Supreme Court on Feb. 2, 2016, but upheld.

India’s Ministry of Petroleum & Natural Gas recommended PNGRB give GAIL an additional extension of time to complete the project due to uncontrollable external factors. PNGRB granted this request Dec. 8, 2016, giving GAIL until February 2019 to commission the KKBM pipeline.

Urban gas distribution

A lack of pipeline infrastructure in Eastern India has left the region’s city gas distribution (CGD) system almost non-existent. The government has taken proactive steps to boost CGD expansion in various parts of the country, including the east. In September 2016, the cabinet committee on economic affairs, chaired by Prime Minister Shri Narendra Modi, approved an $805-million grant to GAIL5 for development of the $2-billion Jagdishpur-Haldia-Bokaro-Dhamra gas pipeline (JHBDPL) project connecting Eastern India with the National Gas Grid.6 Government efforts to prioritize supplying compressed natural gas (CNG) to consumers, however, continue to dampen CGD development.

PNGRB has authorized more than 75 CGD networks across the country supplying roughly 3.87 million private consumers, 7,079 industrial customers, and 25,180 commercial customers. As of Sept. 30, 2017, 1,273 CNG stations were supplying more than 2.93 million vehicles.

Widespread pan-India natural gas pipeline connectivity will increase uniform CGD network development. Reforms in domestic gas pricing and allocation policy, and active promotion of LNG and transmission pipeline infrastructure would improve natural gas penetration across the country.

References

1. Choudhary, S., “GAIL will have 16,000 km of pipeline network by end of 2020: BC Tripathi,” The Economics Times, Nov. 25, 2016.

2. “Grant of Authorization for Surat-Paradip Natural Gas Pipeline against Bid No. BID/NGPL/03/2010/1/SPPL,” Petroleum and Natural Gas Regulatory Board, Apr. 25, 2012.

3. Petronet LNG Ltd., “Annual Report, 2016-17,” p. 16.

4. Supreme Court of India, “Civil Appeal No(s). 759-761 of 2016, Government of Tamil Nadu & Ors. Etc. v. GAIL India Ltd. & Ors. Etc.,” May 2, 2016.

5. Press Information Bureau, Government of India, Cabinet Committee on Economic Affairs, “Cabinet Approves Capital Grant to GAIL for Development of Gas Infrastructure in Eastern Part of the Country,” Sept. 21, 2016.

6. Press Information Bureau, Government of India, Ministry of Petroleum & Natural Gas, “Steps Being Taken to Make India a Gas-based Economy,” Nov. 21, 2016.

The author

Sanjay Kumar Kar ([email protected]) is an associate professor and head at the department of management studies, Rajiv Gandhi Institute of Petroleum Technology, Jais, India. Previously he was an assistant professor at the school of petroleum management, Pandit Deendayal Petroleum University, Gandhinagar, India, and an academic associate at Indian Institute of Management, Ahmedabad. He also served as a visiting scholar at the graduate school of business, Chonnam National University, Gwangju, South Korea. He holds a BS from Fakir Mohan University, Balasore, India, and MBA and Ph.D degrees from Utkal University, Odisha, India. He is a member of the American Marketing Association.