Natural gas is emerging as the preferred hydrocarbon fuel of the future becau-se of its cost efficiency in power generation, fertiliser production, domestic use and even as an auto fuel. A sharp rise in India’s gas production following the discovery and development of gas fields on the East Coast is bringing about a transition, where the gas distribution business is emerging as the new sunshine sector. So much so that the industry is now in for major re-rating in the medium term.

At present, oil constitutes 28 per cent of total primary commercial energy consumption in the country, while natural gas accounts for 8 per cent.

Coal continues to be the dominant fuel, accounting for 57 per cent of total energy consu-mption. This shows the huge potential for the gas distribution business.

As one of the six core industries in the country, the oil and gas sector has a significant role to play in the growth of the economy. The petroleum and natural gas sector, which includes transportation, refining and marketing of petroleum products and gas, constitutes over 15 per of the nation’s gross domestic product (GDP).

Gas Authority of India Limited (Gail), the pioneer in the gas distribution business, came into being almost a quarter century ago, supplying gas from the Cambey basin mainly to fertiliser and power plants along its 1,700-km pipeline running from Hazira in Gujarat to Jagdishpur in Uttar Pradesh. As gas demand for industrial, domestic and automobile use rose, other players such as LNG Petronet, Gujarat Gas and Indraprastha Gas came on the scene. The space is expected to get crowded faster now as a number of city gas suppliers and pipeline network companies join the fray.

Increasing supplies

Reliance Industries, which has started producing gas from its D6 block in the Krishna-Godavari basin, is targeting production of 40 million cubic metres per day by July and double this by the end of 2009. This is expected to take care of the deficit, as there’s demand for 200 million cubic metres per day of gas against available supplies of 110 million cubic metres per day.

Two other companies, Gujarat State Petroleum Corporation and Oil and Natural Gas Coproration (ONGC), which have also struck gas on the East Coast, will bring in an additional 40 million cubic metres per day by 2012.

Due to increasing importance of natural gas as feed stock and fuel, there is a greater need for better infrastructure, including city gas distribution (CGD) networks. Given the efficiency and economic advantages of natural gas, industrial and commercial institutions are set to switch to single-fuel application once natural gas becomes easily available.

Growing interest

The growing interest for natural gas has led to a number of players evincing interest in laying pipelines in the domestic market for supply to consumers. For example, Gujarat State Petronet plans to connect all 25 districts of the state with 2,200-kilometre high-pressure gas pipeline laid down across the state. Reliance Industries plans to invest between $5.45 billion to $6.54 billion over the next three years to lay a 10,000 km pipeline grid that covers the main gas transport trunk lines supplemented by spur lines across the country.

In an effort to develop and fuel growth for the natural gas market, the government has set up the Petroleum and Natural Gas Regulatory Board (PNGRB) which, in turn, has notified regulations for CGD networks for supplying gas to compressed natural gas stations and piped natural gas (PNG) to household consumers, other industrial and commercial consumers.

These regulations, among other things, deal with the authorisation of CGD networks, exclusivity and tariff determination. PNGRB has started expansion of CGD networks to nearly 200 cities, which would entail investments of nearly $2 billion during the Eleventh Plan.

The regulator will look for a “natural gas sourcing plan” and experience in either laying pipelines or piping gas for awarding the CGD projects. Bid winners will enjoy 25 years’ exclusivity on the infrastructure and marketing exclusivity of three-five years. Oil exploration companies such as Reliance Industries Ltd (RIL), Gail India Ltd and Indian Oil Corp have bid for rights to supply natural gas to households and businesses in the country. RIL, through its subsidiary, has bid to sell the fuel in three cities and Gail, the gas distribution monopoly, has bid for four. The board is overseeing the auction.

India plans to expand its natural gas pipeline network by nearly 70 per cent to 17,000 km over the next five years to supply the cleaner fuel to homes, factories and automobiles, B S Negi, a member of the downstream regulator PNGRB, said in April.

The country’s gas utilisation policy has put CGD in the fourth place on its priority list, after existing fertiliser plants, and petrochemical and power projects. At present, nearly 75 per cent of natural gas in India is utilised by the power and fertiliser sectors.

The CGD projects are largely eyeing RIL’s gas output from its reserves in the Krishna Godavari basin. Peak output from the basin is expected to be 80 million standard cubic metres a day (mscmd) of gas, although the company is stuck in a lawsuit that bars it from selling gas.

More bottlenecks

Even though supplies have improved with gas from RIL’s KG D6, distribution (CGD) projects are not in place to receive 5 mscmd, which may further delay supply.

Meanwhile, RIL’s gas production from its deep-sea field off India's East Coast is below capacity as supply agreements with some buyers still need to be finalised, according to P M S Prasad, chief executive of Reliance's oil and gas business.

The firm is producing 28 mscmd of gas from its field in KG basin compared with a production capacity of 37 mscmd. It expects to produce 40 mscmd by July.

While several customers are keen to buy the gas, which is in short supply in Asia's third-largest oil consumer, the company needs to firm up supply agreements with some customers selected by the government.

Reliance is said to be evaluating its options on a court ruling that asked it to supply gas at almost half the price of an interim ruling to former group firm Reliance Natural Resources. If Reliance Natural gets the final verdict in its favour, it will need to set up power plants that can use the gas.

Stock movement

Amid expectations of some sops in the forthcoming budget and an increase in gas supply from the KG basin, the sentiment has been bullish on gas distribution counters in the past few months. The improvement in the top line growth of most gas suppliers has also helped the sentiment.

The stocks of distribution companies have gained 30-86 per cent so far this year. Gas distribution companies such as Gail, Indraprastha Gas and Petronet LNG have posted decent top line growth of 23.68 per cent, 21.34 per cent and 51.47 per cent, respectively in the quarter ended March 31, 2009. Their share prices have also moved up 38 per cent, 32.40 per cent and 85.73 per cent respectively year-to-date.

Gujarat gas, which registered a decline of 9.58 per cent in its net sales mainly due to lower supplies from Gail, also caught up with the rally. The stock has jumped 31.19 per cent.

Getting the infrastructure in place and having supply agreements hold the key to gains from the surging demand for natural gas