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APR 15 2015

Natural gas shortage hits pipeline projects

  • Economic Times, ET Bureau / Hyderabad
  • Created: Wed 15th APR 2015

IOC, BPCL, HPCL, GAIL (India) and GSPL won contracts to build and operate the three gas pipelines with a combined length of 5,000-km under competitive bidding, with estimated investments of about Rs 20,000 crore. (Reuters)

 

Paucity of domestic natural gas has not only impacted user industries like fertiliser and power but has also endangered projects that were meant to build transportation infrastructure for the fuel. The government is set to issue show-cause notices to PSU energy companies, asking why the three inter-state pipeline projects they had bagged — two in 2010 and one in 2011— can’t be cancelled for lack of progress on the ground.

IOC, BPCL, HPCL, GAIL (India) and GSPL won contracts to build and operate the three gas pipelines with a combined length of 5,000-km under competitive bidding, with estimated investments of about R20,000 crore. While the firms are now saying the projects are unviable due to absence of enough anchor load, the government is in a quandary as it can’t even offer viability gap funds to the projects, given that this could prompt those who lost out in the bidding to approach courts against the decision.

According to sources, downstream regulator Petroleum and Natural Gas Regulatory Board (PNGRB) may consider cancellation of the extant contracts and re-auction of the projects with VGF support. Since the companies are not showing an interest in the project, this could not create legal issues also, it is reckoned. The pipelines under review include Mehsana-Bhatinda (1,670-km); Surat-Paradip (1,724-km) and Mallavaram-Bhilwara (1,584-km) .

Even the existing 15,000-km gas transmission network in the country is under-utilised due to paucity of gas.

In the 2014 Budget, the government had announced a plan to double the network in the next few years. At present, 11,000 km of new pipelines have been authorised by the PNGRB, which are in the initial phases of construction or about to commence construction.

“The target is achievable in the next 3-5 years given the current approval status of existing projects. However, the roll-out will obviously hinge on availability of additional gas supplies, viability (demand) of imported gas versus alternate fuels given the current commodity prices and the government’s active support to address on-the-ground local clearances. Also, the planned investments in power and fertilizer units should materialise,” said Dilip Khanna, partner (oil and gas practice) at EY.

In the VGF model, a one-time grant is provided to projects that are economically justified but fall short of financial viability. Natural gas pipeline projects can potentially fall short of viability owing to lack of gas availability or slower growth in demand and also due to market risk from unattractive pricing compared to alternative fuels. The government is mulling a VGF model wherein a bidder for natural gas transmission pipeline would need to quote lowest network tariff and VGF to win the license.

“VGF in case of gas pipelines would be utilised to hedge the license holder primarily from the risk of volatility in international gas or crude prices, lack of supply volumes if the additional regasified LNG capacities are delayed from their present expected commissioning dates as well as slippages in demand build-up,” explained Khanna.

Viability of gas pipe chains depend on cost-competitive gas supplies — infrastructure for connectivity and bankable downstream gas markets. Clear policies and regulations lay the foundation for development of mature gas markets, feel analysts. Long-term outlook on the availability of gas in the country is the single-largest impediment for expansion of national gas grid in the country, they add.Overall, gas availability in the country (including imported LNG) stands at about 160 mmscmd in FY15 compared with a demand of 300 mmscmd.

Key end-user industries are finding it hard to afford re-gasified LNG. Lack of right of way or access is also a concern. Natural gas transmission pipeline projects are very capital intensive — however, there has been very limited private sector participation in the sector, which has also led to stunted growth.

In the 2014 Budget, the government had announced a plan to double the network in the next few years. At present, 11,000 km of new pipelines have been authorised by the PNGRB, which are in the initial phases of construction or about to commence construction. “The target is achievable in the next 3-5 years given the current approval status of existing projects. However, the roll-out will obviously hinge on availability of additional gas supplies, viability (demand) of imported gas versus alternate fuels given the current commodity prices and the government’s active support to address on-the-ground local clearances. Also, the planned investments in power and fertilizer units should materialse,” said Dilip Khanna, partner (oil and gas practice) at EY.

 

In the VGF model, a one-time grant is provided to projects that are economically justified but fall short of financial viability. Natural gas pipeline projects can potentially fall short of viability owing to lack of gas availability or slower growth in demand and also due to market risk from unattractive pricing compared to alternative fuels. The government is mulling a VGF model wherein a bidder for natural gas transmission pipeline would need to quote lowest network tariff and VGF to win the license. “VGF in case of gas pipelines would be utilised to hedge the license holder primarily from the risk of volatility in international gas or crude prices, lack of supply volumes if the additional regasified LNG capacities are delayed from their present expected commissioning dates as well as slippages in demand build-up,” explained Khanna.

 

Viability of gas pipe chains depend on cost-competitive gas supplies — infrastructure for connectivity and bankable downstream gas markets.

 

Clear policies and regulations lay the foundation for development of mature gas markets, feel analysts.

 

Long-term outlook on the availability of gas in the country is the single-largest impediment for expansion of national gas grid in the country, they add.Overall, gas availability in the country (including imported LNG) stands at about 160 mmscmd in FY15 compared with a demand of 300 mmscmd.

 

Key end-user industries are finding it hard to afford re-gasified LNG. Lack of right of way or access is also a concern. Natural gas transmission pipeline projects are very capital intensive — however, there has been very limited private sector participation in the sector, which has also led to stunted growth.

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Gopal Sponge & Power (P) Ltd Grid Gas Tariff Natural Gas Oil Energy Gas Pipeline Petroleum and Natural Gas Regulatory Board Gujarat State Petronet Ltd Petroleum Hindustan Petroleum Corporation Limited Bharat Petroleum Corporation Limited Oil and Gas Liquefied natural gas Budget Power India

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