City Gas Distribution in India

An emerging investment opportunity

City Gas Distribution in India
Overview of Natural Gas Market
► India is the 5th largest energy market in
Sector Wise Gas Consumption (2009)
the world - TPES ~ 433 MTOE
Internal
Consumption
► Natural Gas consumption in 2009-10 is 11%
166 MMSCMD constituting 9% of TPES
Power
Other 33%
► Gas consumption has increased from Industries
1.91 MMSCMD in 1971 to 166 19%

MMSCMD in 2009; a CAGR of ~12% CGD

3%
► Significant investments are planned in Sponge Iron
Fertilizer
27%
the transmission infrastructure 7%

► Plan to add 5000 km of pipeline Natural Gas Demand Projections

network in the next 4-5 years 400
346.79
► CGD sector currently consumes ~ 3-4% 350
299.39
of the country’s natural gas 300 275.48

MMSCM
240.5
consumption 250
204.76
200 166.96

D
Natural Gas is poised to play an important 150
role in Indian energy market – investment in 100
distribution infrastructure will enable last 50

mile connectivity to the population 0

2010 E 2011 E 2012 E 2013 E 2014 E 2015 E

Page 3 City Gas Distribution in India

Overview of City Gas Distribution Market
► During FY05–10, CGD consumption in
India has grown over 30% to reach a Gas Consumption Trend in CGD
current level of ~ 8.5 MMSCMD 5 4%

Share in India's total gas consumption

► Current consumption is concentrated in 4
3%
Gujarat, AP, Mumbai and Delhi
3

mmscmd
► CGD segment is getting active support 2%
2
from the govt. / judiciary – in particular
1%
for switch over to CNG from liquid fuels 1

► Additional ~250 cities identified by 0 0%

FY05 FY06 FY07 FY08 FY09
PNGRB for development in 5-7 years
Consumption Share
1. Distribution market poised for growth with
multiple cities being bid out by PNGRB ► ~18 pre-nominated cities already
2. Cross country pipelines are also being bid covered by CGD
out to provide transmission connectivity ► ~ 13 cities awarded by PNGRB under
3. Evolving bidding / regulatory framework
round 1 & 2 in 2009
aims to encourage more inclusive
participation ► Operational network in 42 GA’s; Under
implementation in 20 more GA’s

Page 4 City Gas Distribution in India

Transmission Pipeline Connectivity
► Transmission pipeline connectivity is
critical for the development of CGD
Projects
► The national gas grid is set to emerge by
2015 with a large number of pipelines
being commissioned
► Recently announced pipelines include:
► Bhatinda – Jammu – Srinagar
Pipeline
► Mehsana - Bhatinda Pipeline
► Mallawaram - Bhilwara Pipeline
While initial roll out of
► Surat – Paradip Pipeline CGD networks have
been around existing
From a current pipeline network of ~ pipelines like HBJ and
EWPL, new pipelines will
11,000 kms, the national gas grid aims
accelerate CGD roll out
add ~ 5,000 kms of new pipelines

Page 5 City Gas Distribution in India

Market Outlook
► CGD network projected to reach 213 new
cities by 2020 Natural Gas Requirement for CGD

► Natural gas demand originating from CGD 120 25%

is expected to increase to over 100

Share in India's total gas consumption

100
20%

Demand (mmscmd)
MMSCMD by FY 20 80
15%

► The share of CGD in the country’s total 60

10%
gas demand is projected to increase to 40

5%
around 20% by FY20 20

0 0%
► Expected investment of INR~400–435 Bn FY10E FY11E FY12E FY13E FY14E FY15E FY20E

with opportunity for players dealing in CGD gas demand

Share in total gas demand
ancillary services
With benefits of offering a clean
fuel, attractive economics and
regulatory support, CGD sector is
an attractive proposition for
consumers, investors and the
society at large

Page 6 City Gas Distribution in India

City Gas Distribution – International Scenario
Natural Gas Market in United Kingdom
► Market is regulated by OFGEM, which
is also the electricity market regulator Natural Gas Consumption Mix

► Large industrial, commercial and Others

residential users free to select their 14%
Other
gas suppliers Industry
Electricity
35%
12%
► The market has integrated energy
Energy
players having presence across value Industry
7%
chain Residental
32%
1. Market has evolved from being PSU
controlled to privatized unbundled Price Composition
units VAT Transmission
2. “Perfect competition” features with Meter Provision 5% 2%
2%
multiple gas sources, multiple Distribution
producers and consumers and a well 15% Environmental
3%
integrated infrastructure network
3. Wholesale and retail prices are not
Energy
regulated; transmission and Supply costs
distribution prices are regulated & Margin
73%
through a five year regime
Page 8 City Gas Distribution in India
Natural Gas Market in Turkey
► Market regulator EMRA grants new Natural Gas Consumption Mix
distribution licenses in cities through
tenders.
Industry
► The tender evaluation is based on the 22%

unit service and depreciation charge

Electricity
(USDC) for supplying one KWh of 55%
Residential
23%
natural gas for the first eight years.
► Entity has to connect all customers
across the distribution region within
five years. Pricing
► Tariffs across the natural gas value
1. Market evolution is similar to India – chain are regulated by EMRA.
private participation post unbundling of
market activities ► Natural gas retail price comprises
2. Distribution is done by 5-6 large entities USDC, gas procurement costs and
3. Local municipalities own 10% of the transmission and storage prices.
CGD Projects
► USDC is the only variable from one
4. Large reliance on imported gas
region to another
Page 9 City Gas Distribution in India
Natural Gas Market in Pakistan
► Pakistan’s Gas industry has witnessed Natural Gas Consumption Mix
high growth over the last decade
► The country had ~96,000 kms of Industry
distribution pipelines and ~56,000 21%
Power
kms of transmission pipelines 43%
Fertilizer
16%
► SNGPL and SSGPL are primary
distributors Domestic
15%
Transport
► The gas transmission network reaches 5%

over 20% of its population

Pricing
► Country has largest CNG market in
► Tariffs across the natural gas value
Asia serving over 2 Mn vehicles
chain are regulated by OGRA

1. Distribution done by 2 primary players
who control ~ 75% of the network
2. The transmission network growth rate
~70% between 2001-09
3. End Prices are regulated
Page 10 City Gas Distribution in India
► Field wise well head gas prices are fixed
► Maximum CNG prices for different
regions are prescribed as well as
Minimum charge and final sales price of
gas for different category of users
Pipeline Density Comparison

India Pakistan Turkey UK

Reserves (TCF) 39.4 32.0 10.3

Consumption 5.0
3.7 3.1 8.4
(BCF per day)

Pipeline
29,000 106,533 275,000
(Km)

Pipeline Density
0.01 0.13 1.13
(km/Km2)

Significant planned investments in transmission and distribution infrastructure, planned

would enable an integrated gas market for India

Page 11 City Gas Distribution in India

City Gas Market in India
Regulatory Framework
► PNGRB was established by the
CGD
Central Government on October 1,
2007
► PNGRB is responsible for the
Authorization by Authorization by PNGRB
regulating refining, processing, MoPNG through bidding
storage, transportation,
distribution, marketing and sale of ØEntities which have ØEntities wanting to
petroleum, petroleum products and laid networks prior to enter the CGD space
the establishment of post the establishment
natural gas PNGRB of PNGRB
In the City Gas Distribution (CGD) ØNeed to submit ØThese entities need to
space, two types of entities operate detailed calculations bid for authorization
1. Authorised by MoPNG to lay the which need to be once PNGRB invites
CGD network before October 1, verified by the board EOI’s for particular
2007 cities
ØAre assured a
2. Authorised by PNGRB through Project IRR (14% post ØIRR is not assured and
the bidding route tax) on their is purely a function of
investment in the bids quoted in the
infrastructure competitive process

Page 13 City Gas Distribution in India

Bidding Framework for New Cities

Highness of the
Lowness of Highness of the
Lowness of present value*
present value* present value*
present value* of number of
of the CNG of the inch – km
of the unit domestic
compression of steel
network tariff consumers to be
charge pipelines
connected
Weightage – 40% Weightage – 10% Weightage – 20% Weightage – 30%
► Tariff to be ► Tariff to be ► Pipeline proposed ► Number of
quoted over 6th- quoted over 6th- to be laid during customers to be
25th year of the 25th year of the the exclusivity connected over the
economic life economic life period (5 years) exclusivity period
► Entity to provide ► Entity to provide ► Entity to provide a ► Entity to provide a
a year wise a year wise year wise inch – km year wise number
network charge compression of steel pipeline of customers
in Rs/MMBtu charge in Rs/Kg proposed to be laid proposed to be
during the connected during
exclusivity period the exclusivity
* Present Value to be calculated using a discount rate of 14% period
Note: All calculations are made from the 6th year onwards.

As per the latest Round III Bidding Framework, the bidding variables need to be within a 20% range
of the DFR parameters subject to a minimum IRR of 6%

Page 14 City Gas Distribution in India

Indicative Timelines

Suo-motu by Board

Firm-up
Invite Bids
EOI Open Advertisement “Authorized
Area” 15
30 days 60 days
15
days days
Bid Evaluation
Gas Tie-up
30 days
90
days
Financial Grant of
Closure 120
Authorization
days

Exclusivity ends
5 YEARS

20 YEARS
End of Economic Life

Page 15 City Gas Distribution in India

Indicative Demand Build Up
► A medium size city will have a long term Demand: Year 3
demand of ~ 1.25 – 1.50 MMSCMD
Household Demand : 0.19
► During the first phase of capex roll out, 12% MMSCMD
CNG
demand is primarily from CNG segment 38%
Commercial
1%
and a few large industrial connections
Industrial CNG and
► Post the steel network roll out, bulk of 49% Industrial
the volume growth is from the Industrial segment as
segment anchor demand

1. Industrial customers are the Demand : Year 25

“anchor demand” – large Demand : 1.43
customers need to be tapped Household
10%
MMSCMD
CNG
upfront 11%
Commercial
2. CNG demand -- impetus from the 1%
judiciary / state govt. Industrial
3. PNG demand switchover rate demand grows
dependant upon level of current faster than other
awareness about gas Industrial segments
78%

Page 16 City Gas Distribution in India

 Margin Drivers

Segment Wise Indicative Gas Price Profitability Grid

35
$/MMBTU

Alternate Fuel Price

Discount to
30
30
Alternate Fuels
25 Indicative Affordable
Price
20
20

15

10
10

5
0
00
Industrial
Industrial Domestic
Domestic CNG
CNG Commercial
Commercial
High margin segment might
Gas Cost+ Network Marketing Margin not offer good volume
Charge intensity…

CGD business offer attractive margins across the four operating segments

Page 17 City Gas Distribution in India

Indicative Capital Expenditure
► For a medium size city with a long term
Capital Expenditure
demand of 1.5 MMSCMD, the ~
Other Costs Pipelines
investment is INR 650 – 675 cr Taxes and
9% 10%
Duties
► Investment during the first three years is 11%

~ 30% of the Project Cost (primarily) LMC

22%
towards roll out of the steel network EPC Costs
18%

► Post exclusivity period, entity invests in RoU

18%
Compressor
providing last mile connectivity and s
12%
marketing of gas
► A typical medium size city would have a
steel network of ~ 50 to 60 kms
1. City Gas Distribution is a capital
intensive business ► Last mile connectivity costs are ~ INR
2. Key to success is quick roll out of 5000 per household connection
the steel network and maximizing
connections ► An online compressor would cost ~ INR
2.0 – 2.5 cr

Page 18 City Gas Distribution in India

Indicative Operating Expenditure
► Opex for network infrastructure primarily Network Opex
comprises Manpower costs and O&M
expenses
► Opex for Compression facilities primarily Manpower
comprises cost of utilities and O&M costs Costs
34%
O&M
Expenses
► O&M costs for distribution infrastructure 54%

are ~ 2-3% of Project Cost

Admin and
Overhead
► O&M Costs for compression are ~ 4-5% of s
12%
the Project Cost on compression facilities
CNG Opex

1. A typical city with a PNG demand

Manpower
of ~ 1.25 MMSCMD would have an Costs
annual opex of ~ Rs 30 – 35 cr Utilities
13% Admin and
Overheads
2. Opex would also vary depending up 32% 5%
on the PNG / CNG demand mix
3. Significant proportion of the opex
is in the form of fixed costs O&M
Expenses
50%

Page 19 City Gas Distribution in India

Thank You