The way ahead for India to build its natural gas highways

The way ahead for India to build its natural gas highways

The Indian gas industry needs to take a leaf out of the playbook being used in other infrastructure sectors like highways to look at new innovative models to develop the national gas grid.

The Macquarie Group recently won the rights to manage 648 km of national highways by bidding Rs 9,681.50 crores in an auction conducted by the National Highway Authority of India (NHAI) under the Toll-Operate-Transfer (ToT) Model. Under the new model, a concessionaire gets the right to collect tolls on highways that have been built via public funding against an upfront lump-sum payment to the government. While the model itself is only a variant of different concession frameworks being employed by NHAI, what is more impressive is the constant drive to try out new and innovative structures to fund development of highways.

Variants include the Engineering, Procurement and Construction (EPC) Model; Build, Operate and Transfer (BOT) Model and the latest trick in its arsenal, the Hybrid Annuity Model (HAM) under which a slew of road projects are being undertaken. The various models employed by NHAI look at different combinations of risk/reward profiles to suit different projects ranging from EPC where projects are fully funded by NHAI, to the BOT model where the rights to build, operate and collect tolls on a project get assigned to the concessionaire for a defined period. HAM combines both models, wherein NHAI supports 40% of the project costs and the investor bears the balance 60%, reducing upfront funding requirements for the concessionaire. More importantly, the demand uncertainty risk is taken up by NHAI which retains the rights to levy and collect tolls from the project, while making fixed annuity payments to the investor throughout the life of the project.

Akin to the national highways, there is a pressing need for new innovative development models for India’s gas highways too. As on date, India has 16,470 km of operational gas pipeline infrastructure in the country, with plans to build a further 13,489 km of new pipelines. The challenge for the gas sector is the slow progress in development of new pipeline infrastructure, which is somewhat constrained by similar challenges in the road sector. The 800 pound gorilla in the room is the question on uncertainty of demand risk – whether its traffic flows for the road sector or gas molecules for pipelines.

For natural gas pipelines, the ambiguity on the demand risk currently sits with the developer. The design capacity of existing gas pipelines in India stands at 387 MMSCMD (Million Standard Cubic Meters per Day), while actual flow rates in the period April – September 2017 were only 166 MMSCMD, leading to an effective capacity utilisation of only 40%. Further, there are large variations across the regions in utilisation levels, with pipeline capacity utilisation in the high demand region of Mumbai network as high 85%, while utilisation for the 1,000 km Dabhol-Bengaluru pipeline being as low as 8%.

Natural gas is inarguably the cleanest fossil fuel source and the Indian government has aptly set the aspiration for increase the share of gas in the country’s fuel mix to 15 per cent. Today, the share of natural gas in the national fuel mix is only 7 per cent, so radical changes are required to achieve the 15 per cent ambition. Gas molecules can only flow to all corners of the country if there is an extensive gas pipeline grid in the country. Like national highways which ultimately yield multiplier effects for the economy, access to clean energy sources has the same multiplier effect for the nation’s economy. Natural gas is used as both fuel and feedstock for a wide range of critical industries like fertiliser, petrochemical, steel, refineries, etc. Any investment in these sectors creates long lasting benefits for the economy, providing employment opportunities for thousands of people, as well as a whole new business ecosystems for small sale suppliers, vendors, etc. Easy access to natural gas as a fuel or feedstock accordingly helps accelerate the ‘Make in India’ vision.

The positive impact of natural gas availability on improving public health is equally pertinent. As new City Gas Distribution projects mushroom across the country, Compressed Natural Gas (CNG) provides much needed relief in transportation from more polluting liquid fuels, as well as cleaner fuel options for households and small scale industrial units. Air pollution is at critical levels in so many cities across India. One can imagine how much worse would have been the woes for the inhabitants of Delhi in the winter smog blanket had the entire public fleet in Delhi not being running on CNG already!

Hence, a critical introspection is required to assess why the pace of development of gas infrastructure is not in step with the aspirations. The likely answer is the age old conundrum of what came first – the chicken or the egg? For the infrastructure sector it translates into the typical mismatch between expensive supply infrastructure costing thousands of crores of rupees or the underlying demand. Looking at the innovative structures being deployed by NHAI, clearly there are viable models that can be extended to the natural gas sector as well on how to de-risk the demand issue and accelerate infrastructure development.

In 2016, the Oil Industry Development Board (OIDB) provided 40 per cent viability gap funding as a capital grant for the Rs 12,940-crore natural gas pipeline from Jagdishpur to Haldia and Bokaro to Dhamra (JHBDPL), which was a good start. However, much more is needed to create the nation’s gas highways to ultimately achieve the ambition of 15 per cent share of natural gas in the country’s fuel mix. We live in the age of disruption today and constant innovation is the need of the hour to tackle issues and resolve impediments. In this digital era, surely we can ‘cut & paste’ existing solutions!.

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