GAIL Gas Ltd, a subsidiary of public sector gas transporter and marketer GAIL India, is engaged in the business of city gas distribution (CGD). In the first round of bidding held by the petroleum & natural gas regulatory board (PNGRB) for six CGD projects in 2008, the company won authorisation to start CGD operations in four cities of Sonepat, Kota, Dewas and Meerut. Meanwhile, it has also submitted bids for four more cities in the second round of bidding. M Ravindran, chief executive officer (CEO), GAIL Gas spoke to Noor Mohammad about the company?s business plans and latest implementation status of four CGD projects for which it has secured authorisation.

What is your company?s long-term outlook on CGD business?

There is tremendous scope for growth in the CGD business, with energy consumption pattern shifting toward clean energy. Today, the emerging challenge is to reduce and manage adverse environmental impact from conventional fossil fuels. The sector is currently growing at the rate of 10-12%. Earlier, domestic gas shortage was a big constraint in the growth of CGD business. But now, gas availability is improving because of supply from the discoveries made on the east coast. What is needed is faster development of infrastructure for CNG business. The regulator is in place. If the regulator goes ahead with bidding schedule, the business will grow fast.

The CNG demand got a boost with the Supreme Court directive on pollution reduction in 12 major cities. The domestic segment is also expected to grow in coming years.

You are a subsidiary of GAIL India. But you will target industrial consumers. Is there any operational overlapping?

GAIL is catering to big consumers in sectors like power and fertiliser. We focus on small gas users in sectors like glass, ceramics and auto component manufacturers. So the two companies are different in their focus.

What support do you get from GAIL India?

We are getting full support. For example, we are sourcing human resources from GAIL India. Besides, the parent will also take care of our law and arbitration cases.

Will you be able to leverage GAIL India?s strengths for you company?s growth?

We will be able to leverage the parent company?s gas transportation infrastructure and its expertise in gas business. If we could achieve scale in our operations, we can become the marketing arm of GAIL India in future. The parent company can then focus on its gas transportation business.

What is the implementation status of four CGD projects for which you secured authorisation from the PNGRB in 2008?

We have started operations in Devas with the commissioning of one CNG station there. Besides, we have also started PNG supply to Ranbaxy?s pharma factory there. We also expect to start operations in Sonepat and Kota in April and May, respectively.

Meanwhile, the 27 km-feeder pipeline from the HBJ pipeline to Meerut is being laid. We expect to start operations in the city by September this year.

You will source gas from the parent company for CGD projects. What kind of transaction would it involve?

We will source gas from the parent company at an arm?s length price. We have an agreement with GAIL India to this effect.

Do you also plan to source imported LNG for CGD business?

Yes. We will source imported LNG from the parent company.

Do you think CGD business will be able to absorb costly LNG?

Currently, LNG price is in the range of $7-8 per mmBtu. Even if price goes up to $10-12 per mmBtu, we can still sell LNG.

What is exactly your business model?

The company will take up distribution and marketing of CNG as fuel for vehicles, intercity as well as intra-city, piped natural gas (PNG) for domestic, commercial and industrial consumers and auto LPG as fuel for transport vehicles in various cities. The company will also set up infrastructure in these cities and along the national highways for building CNG corridors, lay pipeline from city gas stations to the consumption areas and associated facilities, set up distribution points and retail outlets for CNG and auto LPG and transport gas through lorries. It would also undertake allied retail business activities at CNG and auto LPG retail outlets in cities and along the highways.

Do you have any plan to float initial public offer (IPO) in the near future?

We do not have any immediate plan for floating an IPO. But as we grow, we can consider it.

What are the key risk factors you face in the CGD business?

With a growing demand base and increasing supply options, CGD business offers a tremendous investment opportunity. However, to tap this opportunity, developers need to analyse critical aspects of the business.

For example, the industrial segment provides the base load demand for a CGD project, which can be captured in a shorter timeframe. In contrast, the build up of demand in the commercial and transport and residential segments provide better margins but has a longer gestation period. The project rollout should be planned to capture an optimal mix of demand from these segments.

Input gas price and its terms and conditions are very critical for the viability of the city gas distribution projects. Proximity with natural gas pipelines enhances the project feasibility by reducing the capital and input gas costs.

The delivered gas be priced in such a manner as to secure minimum level of profitability for the promoters while providing adequate incentive to induce targeted customers to shift to natural gas.

The feasibility of a CGD project is highly sensitive to the demand the company is able to capture. Therefore, a CGD project developer is exposed to the demand risk. The developer is also exposed to the price risk likely to arise from mismatch in the movement of input gas and selling price.

In addition, a CGD developer is also exposed to the residual risk created by the difference in terms and conditions of contracts with buyers and suppliers.