City Gas Distribution in India An emerging investment opportunity

City Gas Distribution in India

96 240.48 299.39 346.76 275.79 ► CGD sector currently consumes ~ 3-4% of the country’s natural gas consumption Natural Gas is poised to play an important role in Indian energy market – investment in distribution infrastructure will enable last mile connectivity to the population Page 3 City Gas Distribution in India .91 MMSCMD in 1971 to 166 MMSCMD in 2009.5 204. a CAGR of ~12% Significant investments are planned in the transmission infrastructure ► Sector Wise Gas Consumption (2009) Internal Consumption 11% Other Industries 19% CGD 3% Sponge Iron 7% Fertilizer 27% Power 33% ► ► ► Plan to add 5000 km of pipeline network in the next 4-5 years Natural Gas Demand Projections 400 350 MMSCM D 300 250 200 150 100 50 0 2010 E 2011 E 2012 E 2013 E 2014 E 2015 E 166.Overview of Natural Gas Market ► India is the 5th largest energy market in the world .TPES ~ 433 MTOE Natural Gas consumption in 2009-10 is 166 MMSCMD constituting 9% of TPES Gas consumption has increased from 1.

Under implementation in 20 more GA’s ► ► Page 4 City Gas Distribution in India . Distribution market poised for growth with multiple cities being bid out by PNGRB 2. AP.Overview of City Gas Distribution Market ► During FY05–10. / judiciary – in particular for switch over to CNG from liquid fuels Gas Consumption Trend in CGD 5 4 4% Share in India's total gas consumption ► 3% mmscmd 3 2% 2 1 0 FY05 FY06 FY07 Consumption FY08 Share FY09 1% ► Additional ~250 cities identified by PNGRB for development in 5-7 years 1. Cross country pipelines are also being bid out to provide transmission connectivity 3.5 MMSCMD Current consumption is concentrated in Gujarat. Mumbai and Delhi CGD segment is getting active support from the govt. CGD consumption in India has grown over 30% to reach a current level of ~ 8. Evolving bidding / regulatory framework aims to encourage more inclusive participation ► 0% ► ~18 pre-nominated cities already covered by CGD ~ 13 cities awarded by PNGRB under round 1 & 2 in 2009 Operational network in 42 GA’s.

000 kms of new pipelines Page 5 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 . the national gas grid aims add ~ 5.Bhatinda Pipeline Mallawaram . new pipelines will accelerate CGD roll out ► ► ► From a current pipeline network of ~ 11.Bhilwara Pipeline Surat – Paradip Pipeline While initial roll out of CGD networks have been around existing pipelines like HBJ and EWPL.000 kms.

attractive economics and regulatory support. investors and the society at large Page 6 City Gas Distribution in India . CGD sector is an attractive proposition for consumers.Market Outlook ► CGD network projected to reach 213 new cities by 2020 Natural gas demand originating from CGD is expected to increase to over 100 MMSCMD by FY 20 The share of CGD in the country’s total gas demand is projected to increase to around 20% by FY20 Expected investment of INR~400–435 Bn with opportunity for players dealing in ancillary services 120 100 Demand (mmscmd) 80 60 40 20 0 Natural Gas Requirement for CGD 25% 20% 15% 10% 5% 0% FY10E FY11E FY12E FY13E FY14E FY15E FY20E CGD gas demand Share in total gas demand Share in India's total gas consumption ► ► ► With benefits of offering a clean fuel.

City Gas Distribution – International Scenario .

multiple producers and consumers and a well integrated infrastructure network 3. commercial and residential users free to select their gas suppliers The market has integrated energy players having presence across value chain Natural Gas Consumption Mix Others 14% Other Industry 12% Energy Industry 7% Electricity 35% ► ► Residental 32% 1. Wholesale and retail prices are not regulated.Natural Gas Market in United Kingdom ► Market is regulated by OFGEM. Market has evolved from being PSU controlled to privatized unbundled units 2. transmission and distribution prices are regulated through a five year regime Page 8 Price Composition Meter Provision 2% VAT 5% Transmission 2% Distribution 15% Environmental 3% Energy Supply costs & Margin 73% City Gas Distribution in India . which is also the electricity market regulator Large industrial. “Perfect competition” features with multiple gas sources.

Distribution is done by 5-6 large entities 3. Local municipalities own 10% of the CGD Projects 4. Natural gas retail price comprises USDC.Natural Gas Market in Turkey ► Market regulator EMRA grants new distribution licenses in cities through tenders. ► Natural Gas Consumption Mix ► Industry 22% Electricity 55% Residential 23% ► Pricing Tariffs across the natural gas value chain are regulated by EMRA. The tender evaluation is based on the unit service and depreciation charge (USDC) for supplying one KWh of natural gas for the first eight years. USDC is the only variable from one region to another 1. gas procurement costs and transmission and storage prices. Market evolution is similar to India – private participation post unbundling of market activities 2. Large reliance on imported gas Page 9 City Gas Distribution in India ► ► . Entity has to connect all customers across the distribution region within five years.

000 kms of transmission pipelines SNGPL and SSGPL are primary distributors The gas transmission network reaches over 20% of its population Country has largest CNG market in Asia serving over 2 Mn vehicles ► Natural Gas Consumption Mix Industry 21% Fertilizer 16% Domestic 15% Power 43% ► ► ► Transport 5% Pricing Tariffs across the natural gas value chain are regulated by OGRA 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 ► 1. The transmission network growth rate ~70% between 2001-09 3.Natural Gas Market in Pakistan ► Pakistan’s Gas industry has witnessed high growth over the last decade The country had ~96. End Prices are regulated Page 10 City Gas Distribution in India ► ► . Distribution done by 2 primary players who control ~ 75% of the network 2.000 kms of distribution pipelines and ~56.

Pipeline Density Comparison India Pakistan Turkey UK Reserves (TCF) 39.0 3.3 Consumption (BCF per day) Pipeline (Km) Pipeline Density (km/Km2) 5.13 Significant planned investments in transmission and distribution infrastructure.000 1. planned would enable an integrated gas market for India Page 11 City Gas Distribution in India .0 10.4 29.4 32.1 8.01 106.533 0.000 0.13 275.7 3.

City Gas Market in India .

transportation. Authorised by PNGRB through the bidding route Page 13 City Gas Distribution in India . Authorised by MoPNG to lay the CGD network before October 1. petroleum products and natural gas Authorization by MoPNG ØEntities which have laid networks prior to the establishment of PNGRB ØNeed to submit detailed calculations which need to be verified by the board ØAre assured a Project IRR (14% post tax) on their investment in infrastructure CGD ► Authorization by PNGRB through bidding ØEntities wanting to enter the CGD space post the establishment of PNGRB ØThese entities need to bid for authorization once PNGRB invites EOI’s for particular cities ØIRR is not assured and is purely a function of the bids quoted in the competitive process In the City Gas Distribution (CGD) space. storage. processing. marketing and sale of petroleum. 2007 2. two types of entities operate 1. 2007 PNGRB is responsible for the regulating refining. distribution.Regulatory Framework ► PNGRB was established by the Central Government on October 1.

As per the latest Round III Bidding Framework.Bidding Framework for New Cities Lowness of present value* of the unit network tariff Weightage – 40% ► Tariff to be quoted over 6th25th year of the economic life ► Entity to provide a year wise network charge in Rs/MMBtu Lowness of present value* of the CNG compression charge Weightage – 10% ► Tariff to be quoted over 6th25th year of the economic life ► Entity to provide a year wise compression charge in Rs/Kg Highness of the present value* of the inch – km of steel pipelines Weightage – 20% ► Pipeline proposed to be laid during the exclusivity period (5 years) ► Entity to provide a year wise inch – km of steel pipeline proposed to be laid during the exclusivity period Highness of the present value* of number of domestic consumers to be connected Weightage – 30% ► Number of customers to be connected over the exclusivity period ► Entity to provide a year wise number of customers proposed to be connected during the exclusivity period * Present Value to be calculated using a discount rate of 14% Note: All calculations are made from the 6th year onwards. 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 “Authorized Area” 30 days EOI 15 days Open Advertisement Invite Bids 15 days 60 days Bid Evaluation 90 days 30 days Gas Tie-up Financial Closure 120 days 5 YEARS 20 YEARS Grant of Authorization Exclusivity ends End of Economic Life Page 15 City Gas Distribution in India .

CNG demand -. Industrial customers are the “anchor demand” – large customers need to be tapped upfront 2. PNG demand switchover rate dependant upon level of current awareness about gas CNG 38% Demand: Year 3 Household 12% ► Demand : 0.19 MMSCMD Commercial 1% ► Industrial 49% CNG and Industrial segment as anchor demand Demand : Year 25 Household 10% Demand : 1.impetus from the judiciary / state govt.50 MMSCMD During the first phase of capex roll out. bulk of the volume growth is from the Industrial segment 1. demand is primarily from CNG segment and a few large industrial connections Post the steel network roll out.43 MMSCMD Commercial 1% CNG 11% Industrial 78% Industrial demand grows faster than other segments Page 16 City Gas Distribution in India . 3.25 – 1.Indicative Demand Build Up ► A medium size city will have a long term demand of ~ 1.

Margin Drivers Segment Wise Indicative Gas Price $/MMBTU 35 30 30 25 20 20 15 10 10 5 Profitability Grid Alternate Fuel Price Discount to Alternate Fuels Indicative Affordable Price 0 0 0 Industrial Industrial Domestic Domestic CNG CNG Commercial Commercial Gas Cost+ Network Charge Marketing Margin High margin segment might not offer good volume intensity… CGD business offer attractive margins across the four operating segments Page 17 City Gas Distribution in India .

City Gas Distribution is a capital intensive business 2. the ~ investment is INR 650 – 675 cr Investment during the first three years is ~ 30% of the Project Cost (primarily) towards roll out of the steel network Post exclusivity period.0 – 2. entity invests in providing last mile connectivity and marketing of gas ► Capital Expenditure Other Costs 9% Taxes and Duties 11% Pipelines 10% ► EPC Costs 18% RoU 18% LMC 22% ► Compressor s 12% 1.Indicative Capital Expenditure ► For a medium size city with a long term demand of 1. Key to success is quick roll out of the steel network and maximizing connections A typical medium size city would have a steel network of ~ 50 to 60 kms Last mile connectivity costs are ~ INR 5000 per household connection An online compressor would cost ~ INR 2.5 cr ► ► Page 18 City Gas Distribution in India .5 MMSCMD.

Opex would also vary depending up on the PNG / CNG demand mix 3.Indicative Operating Expenditure ► Opex for network infrastructure primarily comprises Manpower costs and O&M expenses Opex for Compression facilities primarily comprises cost of utilities and O&M costs O&M costs for distribution infrastructure are ~ 2-3% of Project Cost O&M Costs for compression are ~ 4-5% of the Project Cost on compression facilities 1.25 MMSCMD would have an annual opex of ~ Rs 30 – 35 cr 2. A typical city with a PNG demand of ~ 1. Significant proportion of the opex is in the form of fixed costs Network Opex ► ► O&M Expenses 54% Manpower Costs 34% ► Admin and Overhead s 12% CNG Opex Manpower Costs 13% Utilities 32% Admin and Overheads 5% O&M Expenses 50% Page 19 City Gas Distribution in India .

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