Published on 25/09/2020 9:26:12 AM | Source: Motilal Oswal Financial Services Ltd

Oil and Gas Sector Update - A deep-dive into the draft regulation for unified tariff By Motilal Oswal

Posted in Broking Firm Views - Sector Report| #Oil and Gas Sector #Motilal Oswal #Sector Report

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A deep-dive into the draft regulation for unified tariff

* The Petroleum and Natural Gas Regulatory Board (PNGRB) is in the process of formulating a single tariff across integrated pipeline network, in line with the aim to reduce transportation cost for natural gas for longer distances.

* The announced open house for the determination of a unified tariff, in respect of Integrated Natural Gas Pipeline System, attracted various comments from stakeholders. Amid this, we garner the comments to highlight the various bottlenecks that remain to be answered by the regulator.


Looking into the past for unsolved puzzles…

* The regulator had attempted to announce a unified tariff in 2018 as well, when many of the prime stakeholders had raised concerns about the idea despite agreeing to its implementation for the greater good.

* Most of the stakeholders have raised a similar concern that selective unification would lead to inefficiencies and pancaking would still pose an issue. Also, there are concerns regarding an increase in input cost for consumers (as in 2018):

         * IOCL mentioned that refinery input cost would increase by INR1b.

         * Torrent power commented that an increase in tariff would increase the power cost and make power production unviable.

* The issues/concerns in 2018 still persist and are the main choke point for unified tariff in 2020 as well (refer exhibit 5):

         * Joining the debate, in the recent open house, the Fertilizers Association of India highlighted that a unified tariff would lead to an increase in tariffs and may prove disadvantageous for urea manufacturers.

         * Some new upcoming LNG terminals (in Gujarat) and newly awarded CGD players stated the end consumer would have to pay an increased unified tariff.

* A major point of debate is the depreciation of very old pipelines (such as HVJ by GAIL, the cost of which is being fully depreciated). While, GAIL has raised concerns over discrimination in capacities between the central governmentauthorized pipeline and other pipelines


…and comparing them with the future for probable answers…

* PNGRB, in its draft document (on 29th Jun’20), has once again invited suggestions/comments from various stakeholders. However, the proposed amendments of a differentiated zonal tariff (initial 300km as zone I and the rest of it as zone II, with the tariff not lower than that of zone I) and the noninclusion of bid-out pipelines in the integrated list remain as they were.

* The integrated natural gas pipeline system (refer exhibit 7 and 8 - comprising ~266mmscmd, i.e., ~80% of the total pipeline network in India) does not include the onshore pipelines of IOCL (~10mmscmd) and RIL (~71mmscmd).

* RIL, in its comments during the open house, stated this would discourage the use of domestic gas production (40–45mmscmd expected from the KG D6 basin over the next two to three years) as the tariff would continue on an additive basis v/s the unified tariff applicable on LNG imports.

* Diving into the comments offered by the legal entities and Advocates of the Supreme Court of India (refer exhibit 6):

          * The unification of bid-out pipelines, along with cost-plus pipelines, would not be legally possible (and would undermine the sanctity of the bidding routes).

          * Also, tariff is to be paid by the consumer to the Authorized Entity only, and the unification of the bid-out pipelines with any of its parent companies may pose a legal challenge

* PNGRB has invited various suggestions to include bid-out/new pipelines to the integrated network list or determine tariff while connecting them to the list. Although, the revision of a unified tariff in three years v/s the revision of an individual pipeline tariff every five years presents a major disparity in the formulation.


...however, some guidelines are a must for building an efficient gas economy

* COVID-19-led lockdown has resulted in some delay in the implementation of various directives announced by the NGT last year. However, recently, a bench of the NGT sought an Action Taken Report (ATR) within four months to ensure a ban on the usage of pet coke and furnace oil by all states and UTs. The date for a further hearing has been set as 15th Jan’21.

         * We believe stringent directives by the NGT, along with the government’s aggressive push to increase gas in the total energy mix to 15% by 2030, would lead to various avenues for growth for gas in the country, as follows:

         *  Industrial pollution is the potential driver of gas consumption in India – Our calculations suggest incremental demand of ~100mmscmd for NatGas could come from the replacement of dirtier fuels.

         * Upcoming fertilizer plants and refinery expansions to create potential gas demand of 17–18mmscmd over the next three to four years.

         * Small-scale LNG (ssLNG) could see potential volumes of 30–35mmscmd – PLNG has signed an MoU with GUJGA and IGL to set up ssLNG stations, and plans to add a total of ~1,000 CNG stations over the next decade.

*   The proliferation of the national gas pipeline across the country remains key to achieving the aforementioned objectives. The recently launched gas exchange also requires gas swapping to facilitate cheaper/economical gas access to the end consumer. Thus, it becomes all the more crucial to make gas accessible to the various corners of the country.

* However, companies have been reluctant about building the trunk pipeline infrastructure without incentives as the projects are capex-intensive with long gestation periods.

* GAIL did not start executing the Jagdishpur–Haldia–Bokaro–Dharma (JHBDPL) pipeline until it received approval for Viability Gap Funding (VGF) for ~40% of the estimated INR129.4b project cost. Similarly, Indradhanush Gas Grid Limited (IGGL) recently acquired VGF approval for~60% of the estimated INR92.7b pipeline cost.

* Owing to lower IRRs, GAIL was awarded six GAs for the development of city gas on the JHDBPL pipeline to render the project feasible.


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