What firms are doing to bag lucrative gas distribution contracts

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Updated: April 1, 2019 12:54:07 PM

These numbers compare to the average of 50 CNG stations (total 4,346) across the 86 GAs during the ninth round.

Similarly, Atlantic, Gulf and Pacific Company of Manila (AG&P), which bagged the state’s Kanchipuram GA, offered to provide 11,51,111 PNG connections in the area which had only 10,06,245 households in 2011.

City gas distribution (CGD) operators seem to always have a trick up their sleeve when it comes to cornering lucrative geographical areas. While in the previous bidding rounds, firms went to the extent of not charging anything as network tariffs from customers, in the just-concluded ninth and tenth CGD rounds, some bidders offered to provide piped natural gas (PNG) to households far in excess of the actual ones in a geographical area (GA), in their over enthusiasm to bag profitable GAs.

For instance, Torrent Gas during the ninth round of CGD licensing offered to provide 33,00,000 PNG connections in the Chennai and Tiruvallur districts in Tamil Nadu by 2029 and won the bid. As per the Census of 2011, there were only 21,01,931 households in this GA. Similarly, Atlantic, Gulf and Pacific Company of Manila (AG&P), which bagged the state’s Kanchipuram GA, offered to provide 11,51,111 PNG connections in the area which had only 10,06,245 households in 2011.

According to a source, “There are around 5-7 GAs auctioned out in the latest two rounds, in which companies have offered to provide more number of PNG connections than households counted in Census 2011.”
In the earlier CGD licensing rounds, operators quoted one-paisa pipeline tariff to win the area they were keen on. Given pipeline tariff had 70% weightage, it was easy to win bids by offering such low charges.

The catch is that there is no restriction on price at which they could sell CNG and PNG, and they are allocated preferential gas from domestic production which is cheaper than imported LNG. So the CGD licence in some GAs can be very gainful even after such seemingly liberal offers.

Taking note of the situation, the PNGRB during the ninth and then the tenth round changed the criteria by giving 50% weightage to PNG connection targets. In addition, 10% each weights are given to network (pipeline) tariff, compression charges and pipeline infrastructure target, and 20% to CNG station targets.

While mostly it has been new entrants who have been aggressive in bidding, incumbent state-run Gujarat Gas was one of the companies during the tenth round which has won a GA by offering more than 100% PNG coverage. Gujarat Gas managed to win one GA during the ninth round in which 86 GAs were up for grab, but came back strongly during the tenth round to win six GAs out of the 50 on offer.

Making ‘irrational’ bids in the oil and gas sector is not rare. During the Open Acreage Licensing Policy rounds, bidders offered to share as high as 99% of the revenue at the peak production. This led to the government diluting the revenue-sharing model for hydrocarbon exploration within two years after its launch as it feared back-loading of production by winners.

AG&P did not answer to queries sent by FE.

A Torrent Gas spokesperson in an email said, “The bid document provided that the bidder shall carefully study the geographical area and charge area before submitting the bid. Additionally, it also provided that it shall be the bidders’ responsibility to obtain all information related to the concerned GA including existing customers.”

According to the company, since bidders were required to indicate their commitment for number of PNG connections they would provide over next eight years till 2026, Torrent Gas prepared its bid on the basis of the number of households and LPG connections in the area in 2017 (taking into account the latest state government data) and made projections for future as to how these would grow on account of various factors. Based on such reasonable projections which were based on credible information published by the state government, Torrent Gas offered its commitment for number of PNG connections it would provide by 2026.

“In fact, the number of households in the Chennai and Tiruvallur GA in FY2017 was higher than the number of PNG connections offered by Torrent for FY2026. The Petroleum and Natural Gas Regulatory Board, the expert regulatory body, awarded the Chennai GA to Torrent based on its extensive evaluation, which established that Torrent’s bid was reasonable,” said Torrent Gas.

Interestingly, for the two GAs for which FE has reviewed data, the prospects of selling CNG is quite high. While Torrent Gas has offered to establish 222 stations in Chennai and Tiruvallur districts, AG&P will be putting up 111 stations in the Kanchipuram district. These numbers compare to the average of 50 CNG stations (total 4,346) across the 86 GAs during the ninth round.

CNG and PNG are clubbed together during bidding because no operator would like to take up PNG as this is an expensive proposition. According to a sector expert, PNG is a long-term play as the installation cost varies from `8,000 to `15,000 per household whereas they are charged around `5,000 upfront. “The return on investment comes over a period of time given the life of these installations is 40 years,” said the expert.
The expert pointed out that the penalty for not achieving PNG targets is `750 per connection per year. “Operators seems to have factored in penalty and built a model wherein they may still remain profitable by selling CNG.”

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