As of 2009, India has a total natural gas pipeline infrastructure of around 10,776kms with a designated capacity of ~250mmscmd.

GAIL currently owns and operates around 67% of the total pipeline network, with over 7200 km of pipeline spread across the country. Its existing gas infrastructure can support the production and transportation of 142mmscmd of gas.

GSPL owns and operates 1,635km of pipeline with a transmission capacity of 50 mmscmd, occupying second place.

RGTIL “the east-west pipeline” has joined hands with GSPL and GAIL. It has a total pipeline network of ~1440km with a total carrying capacity to transport 120mmscmd.

Poor penetration of gas pipeline network in India

To date, development of gas pipelines has been very discouraging in India. By world standards, pipeline spread is lower than that in developed and other developing nations. India has been lagging in pipeline spread vis-à-vis other nations, with only 3.29km/1000 sq. km.

At present, there are only two cross-country pipelines to transport gas from sources to demand points. With a Regulatory board (PNGRB) in place, it is expected that infrastructure will get a boost. Three cross-country pipelines have already been bid out and PNGRB has conducted 4 rounds of CGD bidding. The bidding process has, however been moving in fits and starts, partly due to policies and part owing to lack of visibility in gas availability. It will be an economic pity if we are unable to realise these opportunities beacuse of inadequate gas infrastructure. Thus, going foward, CGD and pipeline authorization process are expected to gain traction.

Pipeline network is expected to grow from current ~10,776km to ~24,546km.

With 17 networks already licensed, bids are pending for 22 cities. There has been phenomenal participation in CGD bidding process as we have seen some cities with more than 10 bids. GAIL has ambitious plans to roll out CGD infrastructure across 50 cities by FY14. GOI has plans to bring 200 cities under CGD coverage by FY14 while auctioning 15-20 cities every year. (Refer Annexure VIII for details)

Concerns on pipeline bottlenecks is expected to ease as platform is being laid for gas to flow

GAIL, with its dominating position in the pipeline segment, has announced an aggressive expansion plan, doubling its capacity from the current level of ~7000km to ~14,000km, increasing its transmission capacity from ~150mmscmd to ~300mmscmd by FY14E. Its major pipeline projects include: upgradation/extension of HVJ-GREP network, Jagdishpur- Haldia pipeline, Dabhol-Bangalore pipeline, and Kochi-Mangalore-Bangalore pipeline. The three new cross-country pipelines are likely to be completed only in FY13 and should be able to release pipeline constraints in central and northern India.

GSPL with its dominance in Gujarat is planning to expand further across Gujarat. It has recently participated in bids for construction of 4 pipelines aggregating 5675 km. Financial bidding for 2 of them is already taken place and GSPL has bagged the orders (Mehsana- Bhatinda – 1670 KM and Mallavaram-Vijapur-Bhilwara – 1585 KM). PNGRB has invited bids for laying Surat-Paradip Pipeline and the bidding for pipeline (Bhatinda-Jammu-Srinagar) is likely to begin soon.

RGTIL plans to expand across southern and eastern India. It Plans to lay a 1,100-km long pipeline from Kakinada (AP) to Howrah (West Bengal). However, project is being delayed on account of questions being raised on additional gas availability from KG basin.

Central Gas management System

It can be seen from the pipeline network map that large parts of eastern, central and southern remain detached from the supply of gas. In order to facilitate the to and fro of gas across the inaccessible portions of India, it has been suggested that a national gas grid inter-connecting all regional networks be developed. It has been featured in Finance minister’s budget speech and a detailed study was carried out by GAIL on development patterns of integrated gas transmission and distribution networks of the major gas consuming countries of the world.

There has been talk on constructing long-distance national gas highway for some time now and it has been proposed that a new National Gas Authority of India be set up for executing the plan.

PRICING – AN IMPORTANT VARIABLE IN THE WHOLE GAS EQUATION

At present, there are broadly two pricing regimes for gas in the country – gas priced under APM and non-APM or free market gas. The price of APM gas is fixed by the Government. ONGC and OIL would have the freedom to sell any production from new fields in their nominated blocks at non-APM rate. As regards non-APM/free market gas, this could also be broadly subdivided into two categories, namely, imported LNG and domestically produced gas from JV fields. While the price of LNG imported under term contracts is governed by the SPA between the LNG seller and the buyer, the spot cargoes are purchased on mutually agreeable commercial terms. As regards JV gas, its pricing is governed in terms of the PSC provisions.

Regulated gas pricing in the past

Historically, India had dual gas pricing norms where APM gas produced by state-owned companies was heavily regulated and priced differently as compared to non-APM gas from private companies and JVs. Until May 2010, prices ranged from around $2/mmbtu for APM gas to almost $6/mmbtu for the most expensive non-APM gas. Gas prices generally remained low as compared to international benchmarks like Henry Hub.

Although pricing under NELP is unregulated, it has to be approved by government

Such mismatch called for a transition to market determined gas prices in long run. In 1997, DGH created NELP for all public, private and foreign players to compete on a level playing field. Under NELP producers are allowed to charge market-determined prices, however it has to be approved by government in terms of price/formula determinations.

PRICING OF KG-D6 GAS UNDER NELP:

The following price basis/formula for the purpose of valuation of natural gas has been approved by the government in case of KG-D6 Block of RIL/Niko. This approved price is applicable for 5 years from April 2009

It was decided that price discovery process on arm’s length basis will be adopted in the future NELP contracts, only after the approval of the price basis/formula by the Government. It was also decided that the price discovered through this process would be uniformly applicable to all the sectors.

A step towards market linked prices

APM prices were increased from USD1.8/mmbtu to USD4.2mmbtu, and ONGC and OIL were allowed to market gas discovered in new fields allocated to them at market prices. This could be a positive development for the sector as it can be viewed as a base for gas prices in the country. Thus, government intends to boost participation in upstream sector through slowly moving towards market linked prices for natural gas. Moreover, if India wants to attract additional LNG in the long term, it would be required to compete on global grounds at prices potentially higher than the current ones.

Average gas prices set to rise in future

The price increase in APM to USD4.2/mmbtu has set the floor for newly discovered gas fields. Thus, existing gas prices that are up for revision and new fields coming up are getting contracted above USD4.2/mmbtu.

ONGC has publicly announced that it won’t be viable to set the price for gas produced from KG-DWN-98/2 block below ~USD7/mmbtu.

Cairn has proposed a hike in the price of gas from the satellite fields to USD5.73/mmbtu, but the same has not been agreed to by the government.

GEEC has already entered into a long term agreement with SAIL Growth Centre, Kulti and Kedia Group of Industries at a price of USD9 – 17/mmbtu for its CBM blocks in Raniganj.

Weighted average price to increase with rise in LNG prices

A contract was signed with RasGas, Qatar for supply of 5mmtpa LNG (equivalent to about 19mmscmd) by Petronet LNG Limited (PLL) and supplies commenced from April 2004. This quantity has subsequently increased to 7.5mmtpa wef. January 2010. The price for LNG has been linked to JCC crude oil under an agreed formula. However, the FOB price for the period up to December 2008 has been agreed at a constant price of USD2.53/mmbtu. This price translates to RLNG price of USD3.63/mmbtu ex-Dahej terminal. The price would vary on monthly basis from January 2009. If crude oil prices trade above USD80/ bbl, then the long and spot LNG prices are likely to be more expensive in the future.