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Report on CGD Business: in India

School of Petroleum Management, Gandhinagar, Gujarat, India
www.spm.pdpu.ac.in

Prepared Executive MBA 2010 student: Abhik Tushar Das (20104001)

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Contents: Contents: S No. Topic Page Number

Natural Gas facts

Overview of CGD business in India

CGD Infrastructure

Natural Gas Transportation Network

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Supply Chain in CGD

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Project Management aspects

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Market Development

17

Customer Service issues

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Major Commercial Issues

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QHSE in CGD

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11

CGD Regulation

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Natural Gas facts: Natural Gas facts:

Natural gas (also called Marsh Gas, Swamp Gas or Landfill Gas) is a naturally occurring gas mixture as a result of the decay of plant/ animal remains, consists primarily of methane, typically with 020% higher hydrocarbons (primarily ethane). It is found associated with other hydrocarbon fuel, in coal beds, as METHANE CLATHRATES, and is an important fuel source and a major feedstock for fertilizers. Most of the natural gas that is brought out from under the ground is millions and millions of years old. Britain was the first country to commercialize the use of natural gas. Around 1785, natural gas produced from coal was used to light houses, as well as streetlights. The American natural gas industry got its beginnings in this area in 1859, when Colonel Edwin Drake (a former railroad conductor who adopted the title 'Colonel' to impress the townspeople) dug the first well to hit oil and natural gas at 69 feet below the surface of the earth. During most of the 19th century, natural gas was used almost exclusively as a source of light as without a pipeline infrastructure, it was difficult to transport the gas very far, or into homes to be used for heating or cooking. In 1885, Robert Bunsen invented what is now known as the Bunsen burner. He managed to create a device that mixed natural gas with air in the right proportions, creating a flame that could be safely used for cooking and heating. One of the first lengthy pipelines was constructed in 1891 which was 120 miles long, and carried natural gas from wells in central Indiana to the city of Chicago. Based on the type of source Natural gas is classified as associated and nonassociated gas and there is of no significance when end use is concerned. 1. Associated gas is natural gas found in crude oil reservoirs either dissolved or in conjunction with crude oil deposits and it is also called as Oil well gas 2. Non-associated gas is Natural gas found in reservoirs separate from crude oil wells and it is also called as Dry gas Based on the sulphur content the natural gas is classified as sour gas which contains higher level of sulphur content in its composition and sweet gas has
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very little or nil sulphur. The thermal efficiency varies from 9000 k.cal to 13500 K.cal per Kg based on the composition of Gas. Natural Gas Transportation modes: Through pipelines as gas Through tankers as liquid (LNG) Natural Gas Distribution modes: For industrial/ house hold consumers (PNG) For transport vehicles (CNG) Approximate Composition of NG: Name Methane Ethane Propane Butane Carbon Dioxide Oxygen Nitrogen Hydrogen sulfide Rare gases Chemical Formula CH4 C2H6 C3H8 C4H10 CO2 O2 N2 H2S A, He, Ne, Xe Composition (%) 70-90% 0-20%

0-8% 0-0.2% 0-5% 0-5% traces

Overview of CGD business in India:

Ministry of Petroleum & Natural Gas established the Petroleum and Natural Gas Regulatory Board (PNGRB) with effect from 01.10.2007, under the Petroleum and Natural Gas Regulatory Board Act 2006, to regulate the refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas excluding production of crude oil and natural gas. The Petroleum & Natural Gas Regulatory Board Act2006 provides the legal framework for the development of the natural gas pipelines and city or local gas distribution networks. With the arrival of the

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PNGRB the implementation of PNG in various cities is being taken up in a phased manner as and when the bids are called for by the Regulator. Gas supply sources in India: 1. APM (Administered Pricing Mechanism) Gas from traditional fields of State PSU (Public Sector Undertakings) 2. KG (Krishna Godavari) Basin gas from private players 3. CBM (Coal Bed Methane) gas 4. RLNG (Re-gasified Liquefied Natural Gas) imports

Largest Gas producing countries: 1. United States = 19.3% 2. Russia = 18.4% 3. Canada = 5.0% 4. Iran = 4.3% 5. Qatar = 3.6% 6. Norway = 3.3% 7. China = 3.0% 8. Saudi Arabia = 2.6% 9. Indonesia = 2.6% 10.Algeria = 2.5% Source: www.bp.com/statisticalreview

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India is the 7th largest energy producer, the 4th largest primary energy consumer and the 13th largest Natural Gas consumer in the world. Hence it is evident that India lacks gas usage in its energy basket. According to the India Hydrocarbon Vision 2025, the contribution of Natural Gas in the Indian energy basket shall grow to a significant 25%. Share of future energy supply in India (%) YEAR 1997-98 2001-02 2006-07 2010-11 2024-25 COAL 55 50 50 53 50 OIL 35 32 32 30 25 GAS 7 15 15 14 20 HYDEL 2 2 2 2 2 NUCLEAR 1 1 1 1 3

Source: India Hydrocarbon Vision 2025 SUPPLY/DEMAND-NATURAL GAS MMSCMD (in million standard cubic meters per day) YEARS 1999-2000 2001-2002 2006-2007 2011-2012 2024-2025 Source: India Hydrocarbon Vision 2025 DEMAND 110 151 231 313 391

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Gas demand break-up:

As evident from the trend, City Gas has a huge upside potential based on Government of Indias Hydrocarbon Vision-2025 and the existing fuel mix in our energy basket. The infrastructure development for transporting the gas from well head/ regassification terminals to the end user involves laying of Gas Highways which are capital intensive and hence have long gestation periods.

Moreover, with Durban Climate Change talks moving towards a substantial outcome, India being the fourth largest GHG emitter in absolute terms would face emission cut targets by 2020. Switching over to cleaner fuel would help India achieve reduction in Carbon footprints.

Subsidy on LPG (cooking fuel) is another contentious issue concerning the national exchequer with subsidy bills denting the fiscal deficit targets. Substituting LPG (Liquefied Petroleum Gas) by PNG (Piped Natural Gas) would
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reduce the Governments subsidy burden and help market price realization for cooking fuel. Natural Gas would also reduce dependence on Kerosene and Firewood as source of cooking fuel which have high carbon emissions.

CGD Infrastructure:

CGD Value Chain:

CNG stations are of four major types depending upon the structure and operations: 1. CNG Mother Stations: Mother Stations are connected to the pipeline and have high compression capacity. These stations supply CNG to both vehicles and daughter stations through mobile cascades 6 . The Mother Station requires heavy investment towards compressor, dispensers, cascades, pipelines etc. 2. CNG Online Station: CNG vehicle storage cylinders need to be fitted at a pressure of 200 bars. Online stations are equipped with a compressor of relatively small capacity, which compresses low-pressure pipeline gas to the pressure of 250 bars for dispensing CNG to the vehicle cylinder.

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3. CNG Daughter Station: The Daughter Stations dispense CNG using mobile cascades. These mobile cascades at daughter stations are replaced when pressure falls and pressure depleted mobile cascade is refilled at Mother Station. The investment is least among all types of CNG stations. 4. CNG Daughter-Booster Station: Installing a booster compressor can eliminate drawbacks of daughter stations. The mobile cascade can be connected to the dispensing system through a booster. Daughter booster is designed to take variable suction pressure and discharge at constant pressure of 200 bars to the vehicle being filled with CNG.

Pipeline pressure Main transmission grid line pressure Distribution/Service line pressure Domestic connection pressure Supply pressure (large commercial consumer) Supply pressure (small commercial consumer)

Specifications (High Pressure System) = 1419 bar, Steel (Medium Pressure System) = 4 to 1.5 bar, MDPE (Low Pressure System) = 21 mbar, GI 2 bar 300 mbar

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LMC: Last Mile Connectivity

Gas Supply System Comprises of: 1. The Service Regulator: It is housed in a grey metal kiosk, which reduces the gas pressure from 4 BAR to 110 mBAR and ensures the flow of gas at constant pressure at all time. 2. Buried Polyethylene Pipes: The pipes are installed at a safe and secure depth. It provides low-pressure gas (110 mBAR) to individual buildings. 3. The Riser Pipe (GI pipe): This is an external connection on the building to each apartment. Each Riser Pipe (GI pipe) has a Riser Isolation Valve. 4. The Meter Control Valve: Fitted in the entrance of the house / flat, this valve is between the riser pipe and your meter. 5. The Meter Regulator: Installed before the meter, the meter regulator reduces the gas pressure from 110 mBAR to 21 mBAR 6. The Appliance Valve: This valve switches on/off the gas to burning appliance.

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Natural Gas Transportation Network:

Natural Gas is transported in two ways; Through Pipelines (gaseous mode) Through compressed cylinders (liquid mode)

According to Oil and Gas Journal, India had approximately 38 trillion cubic feet (TCF) of proven natural gas reserves as of January 2011. EIA estimates that India produced approximately 1.8 TCF of natural gas in 2010, a 63 percent increase over 2008 production levels. The bulk of India's natural gas production comes from the western offshore regions, especially the Mumbai High complex, though recent developments of fields in the Krishna-Godavari (KG) basin. Currently trunk lines installed are around 11000 KM (300MMSCMD) mainly in northern and western India by GAIL =67%, RGTIL =14% and GSPL=11%, OIL/Gujarat gas =8%. Major Gas Pipelines in India: 1. 2. 3. 4. 5. EAST WEST PIPELINE (EWPL): 1385 kilometers HAZIRA-BIJAIPUR-JAGDISHPUR (HBJ): 3397 kilometers DAHEJ-VIJAIPUR PIPELINE (DVPL): 770 kilometers DAHEJ-HAZIRA-URAN PIPELINE (DUPL): 500 kilometers Gujarat Gas Grid: 1550 kilometers

GAIL owns and operates over 8000 km of pipeline and has about 2/3rd market share in the Natural Gas business in India. Other players include RGTIL and GSPL with a combined pipeline network of 3000 kilometers. However there is immense scope of growth in this sector with the ambitious Gas Highway Project connecting the east coast and the west coast with the hinterland.

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Future expansion plans: Gas Authority of India Ltd (GAIL) plans to add 6,663 kilometers of pipelines by FY13. RELIANCE GAS TRANSPORTATION INFRASTRUCTURE (RGTIL) plans to add 2,875 kilometers of pipelines. GUJARAT STATE PETRONET (GSPL) aims to add around 800 kilometers of pipelines to its existing capacity in Gujarat.

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Supply Chain in CGD:

CGD Companies in India: 1. MAHANAGAR GAS LIMITED (MGL): MGL is a joint venture between GAIL (India) Ltd, the BG Group, (U.K.) and the Government of Maharashtra. 2. SABARMATI GAS LIMITED (SGL): Sabarmati Gas, a retail joint venture between Bharat Petroleum Corporation (BPCL) and Gujarat State Petroleum Corporation (GSPC). 3. INDRAPRASTHA GAS LIMITED (IGL): IGL is a joint venture between GAIL and Bharat Petroleum. 4. AAVANTIKA GAS LIMITED: AGL is a Joint Venture company of GAIL (India) Limited and Hindustan Petroleum Corporation Limited (HPCL). 5. BHAGYANAGAR GAS LIMITED: BGL is promoted by GAIL (India) Limited and Hindustan Petroleum Corporation Limited (HPCL) 6. CENTRAL UTTAR PRADESH GAS LIMITED: GUGL is a joint venture between GAIL (India) Limited and Bharat Petroleum Corporation Limited. 7. CHAROTAR GAS (Cooperative Company): CHAROTAR GAS SAHAKARI MANDALI LTD is the first Co-Operative Sector in India in area of City Gas Distribution. 8. GAIL GAS: It is a wholly owned subsidiary of GAIL (India) Limited.

9. ADANI GAS: ADANI GAS is a wholly owned subsidiary of the ADANI ENTERPRISE LTD (AEL). 10. GUJARAT GAS COMPANY LIMITED: GGCL was originally promoted by the Gujarat government and the Mafatlal Group. BG Group acquired a majority stake (65.12%) in GGCL in 1997 and plan to exit in 2011-12. 11. GUJARAT STATE PETROLEUM CORPORATION LIMITED (GSPC GAS): GSPC GAS is a wholly owned subsidiary of the GSPC Group.

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12. GREEN GAS LIMITED: Green Gas is a joint venture between GAIL (India) Limited and Indian Oil Corporation Limited. 13. HARYANA CITY GAS DISTRIBUTION LIMITED: HCG is a company promoted by SKN- BENTEX group of Industries. 14. MAHARASHTRA NATURAL GAS LIMITED: MNGL is a closely held company promoted by BPCL and GAIL with Govt. of Maharashtra. 15. TRIPURA NATURAL GAS COMPANY LIMITED: TNGCL is a joint venture of TIDC Ltd. [A Govt. of Tripura undertaking], AGCL [A Govt. of Assam undertaking] and GAIL.

As is evident from the list, GAIL and BPCL/ HPCL/ IOCL are JV partners in all CGD ventures till date. This is done to ensure supply security of Gas at affordable rates as opposed to sourcing from spot LNG markets which could jack up gas costs.

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Project Management aspects:

Project Management for City Gas networks would consist of setting up of; 1. Gas Transportation Network 2. Gas Distribution Network Aspects of Project Management associated with; a. Transportation: Planning of Integrated pipeline network development for connecting major consumer centers such as Special Economic Zones (SEZs), Industrial units, Power plants, Fertilizer units and commercial establishments including related investigations. GIS/GPS/Remote Sensing based Feasibility studies for identification of Route for laying cross country pipelines. GIS based Route optimization studies considering factors such as Terrain, Land Development, Environment clearance, Ease of Construction, Land cost, Accessibility for O&M, pipeline Economics and other constraints. Preliminary 3D analysis of pipeline corridors using latest satellite stereo images, generation of Alignment Sheets, Cadastral mapping including generation & management of ownership details. Detailed Hydrological Studies for pipeline crossing locations of water bodies including major rivers with firm recommendations regarding depth of pipeline burial. Stability analysis including slope protection works on turnkey basis (EPC) for laying pipeline in highly erosive type of soil, GHAT regions & hilly terrains. Project Management Consultancy Services (PMC) for pipeline construction involving Quality Monitoring, Progress Monitoring, Certification of bills and close out reports. IT enabled project monitoring applications for Quality measures including online/web progress reporting systems.

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WEB based Asset Management - Design and development of web application to support activities in the area of engineering, construction, Health-Safety-Environment (HSE) and Operation and Maintenance (O&M) of pipelines.

b. Distribution: Development of accurate Base maps and GIS database using high resolution satellite imageries for showing present and future development to facilitate prioritization of development of Gas distribution network. Study of Demand and Supply by undertaking field survey and interaction with all concerned statutory bodies including projection of future growth to create a master database of Demand centers. Optimization & Planning of CGD network considering feasibility of laying pipeline from the availability of corridor (by scanning for foreign utilities using GPR/pipe locator), Ease of construction, O&M, Disaster management and Environmental impact. Preparation of corridor mapping, Identification of various statutory authorities and ownership along the identified pipeline corridor including preparation of necessary proposals and obtaining necessary clearance/approval (ROW: Right-of-Way and ROU: Right-of-Use). Design of CGD network including optimization, selection of suitable material and finalization of thickness including preparation of Bill-ofQuantity (BOQ) and Tender documents Floating of tenders, bid evaluation and appointment of contractors Trenchless technology for laying pipeline in Dense Urban area including renovating old pipelines. Project Management Consultancy Services (PMC) for CGD network construction involving Quality Monitoring, Progress Monitoring, Certification of bills and close out reports. IT enabled project monitoring applications including for Quality measures, online/web progress reporting systems. WEB GIS solution for City Gas Distribution operation & maintenance Design and development of web application to manage city gas

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distribution enterprise geo database with functions to support Marketing, Engineering and O&M. Market Development:

The CGD Market consists of gas consumers whose gas usage is less than 0.5 MMSCMD and hence can be classified as; 1. Automobile users refilling CNG in vehicles: Natural gas replaces conventional fuels like Gasoline and Diesel which demand a modified engine design for adapting to the change. The market development in this segment would depend upon Governments subsidy policies on Diesel as well as international crude oil prices which would influence the buyer sentiments. The cost of conversion (CNG kit installation) also plays a major role in consumer demand for the fuel as is the availability of Gas in remote destinations. 2. Domestic PNG User for cooking and heating purposes: Domestic LPG is highly subsidized by the Government of India and is delivered to the consumer in filled cylinders. As cylinders can be stored, LPG offers reliability of supply as well as low cost of ownership. Natural Gas cannot be stored in cylinders and hence is routed to the customer through a network of Gas pipelines up to the point of usage. Since laying of gas pipelines involve high fixed costs, the whole cost is unfeasible to be borne by the Gas company. Hence the consumer needs to share the cost burden which acts as a disincentive as against LPG ownership costs. 3. Commercial establishments like Hotels, garages, restaurants etc: Commercial establishments are supplied with LPG at an unsubsidized rate. These establishments use moderately higher volumes of gas as compared to domestic users. Frequent changing of cylinders pose logistical challenges to these establishments in terms of costs and availability of gas. But India is dominated by unorganized retail wherein supplying PNG to roadside food vendors is not feasible. Hence policies framed by Government and local bodies (Municipalities) would help in developing markets for CGD companies in this sector.

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4. Small and Medium Enterprises (SME): Small-scale factories offer the most lucrative business opportunity for CGD companies. These establishments thrive on Diesel/ Fuel Oil for heating their furnaces and incur huge logistical cost of storage. Some processes which demand clean fuel opt for commercial LPG which is costly. Use of FO can involve high maintenance cost and poor burner-tip efficiency. CGD companies can leverage the high calorific value aspect of gas and can promote nearzero emissions for marketing their product. Though gas can substitute existing fuels, affordability remains a key issue. With spot-LNG rates peaking by the day, the cost of ownership for gas users becomes high and hence unfeasible. Support from financial institutions and CGD companies are required to incentivize businesses to switch over from traditional fuels to a more efficient and clean fuel. Moreover international regulations in the form of emission targets (KYOTO Protocol) can aid the gas business. Customer Service issues:

Customers are most valuable for any businesses, hence identifying and addressing customer service issues is of paramount importance. The main areas of concern for a CGD customer can be listed as; 1. Quality of Gas: The calorific value of Gas determines the quality of gas. The lower the calorific value more volume of gas would be required to get the desired amount of heat energy. The quality of gas in a CGD network depends upon the HHV (High Heating Value), LHV (Low Heating Value) and the WOBBE Index. The gas quality also depends upon the share of non-combustibles (Nitrogen, CO2, H2S, and inert gas) in the gas. The customer needs to be convinced that the gas quality at the burnertip is optimum to the price paid. 2. Safety of equipment: Natural Gas being highly combustible can be a source of potential hazard if not handled adhering to safety precautions. CNG is stored at high pressures and hence equipments need to be built

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conforming to safe design standards. Consumers need to be assured of safe working of equipments and round-the-clock emergency support. 3. Reliability of supply: As Natural Gas cannot be stored, the supply reliability has to be 100%. Any disruptions in supplies can result in direct impact on business operations which could lead to losses. In case of CNG, refilling time has to be minimized to attract potential customers. Serpentine queues at refilling station is a common sight which dissuades automobile users to switch over to Gas. 4. Billing issues: Erroneous metering can result in over/ under billing which could be detrimental to customer sentiments. As gas cannot be easily measures (against LPG/ Oil which can be weighed/ measured) the consumer relies on the quality of meters supplied by the CGD Company. Regular calibration of meters would reduce billing errors and installing smart meters would help CGD companies avoid issues of meter tampering.

Major Commercial Issues:

As demand for Natural Gas increases, CGD companies are faced with commercial challenges such as; 1. Sourcing of cheap gas: Due to high price differential between APM/ non-APM/ RLNG, CGD companies need to fix long term purchase contracts to ensure consistent prices of supplies as well as to avoid frequent tariff revisions which dissuades consumer buying attractiveness. 2. Delivery contracts: CGD companies need to ensure robust contracts to avoid take-off failures which lead to under-utilization of its network capacity. Take-or-pay contracts with accurate nomination are essential to determine the consumer usage pattern which prevents supply/ delivery shocks.

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3. Capacity booking: Optimum capacity booking to minimize the transportation charges of gas over long distances can help CGD companies increase margins. 4. Gas pooling: The proposed concept of gas pooling by the Government of India to reduce price volatility as it is extremely difficult for price sensitive consuming industries to plan operations purely based on LNG from future sources. A single benchmarked price of natural gas in India would be in the larger interest of the consumers, and also benefit the market development of natural gas in this country.

QHSE in CGD:

Natural Gas MSDS:

Natural Gas is a highly flammable gas and hence handling large volumes of Natural Gas can be a challenging task. CGD network passes through densely populated areas and hence the potential threat of any hazard is significantly large. PNGRB regulations of T4S (Technical Standards and Specifications including Safety Standards) include; 1. Schedule 1A MATERIALS AND EQUIPMENT 2. Schedule - 1B WELDING 3. Schedule 1C PIPING SYSTEM COMPONENTS AND FABRICATION DETAILS 4. Schedule 1D DESIGN, INSTALLATION AND TESTING 5. Schedule 1E OPERATING AND MAINTENANCE PROCEDURES
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6. Schedule 1F CORROSION CONTROL 7. Schedule 1G MISCELLANEOUS QHSE issue in CGD business; 1. High transmission pressures 2. Remote location of transmission pipelines (high emergency response time) 3. Distribution lines pass through thickly populated areas 4. No control of source of ignition near pipelines 5. Pipelines are buried; hence maintenance and leak detection is tedious 6. Consumers are not well equipped to deal with exigencies 7. Unplanned/ un-notified dredging by external agencies 8. Use of non-standard fittings by the customer (CNG kits) Possible solutions; 1. Use of SCADA/ GIS to map remote pipeline networks 2. Automatic isolation valves 3. Customer education programs 4. Proper route mapping and marking as hazardous zone 5. Proper Leak Detection Equipments to prevent major disasters 6. Synchronization with local bodies/ agencies to avoid pipeline damage, notifying fire brigade about new gas pipeline routes in a given area 7. Undertake Asset Integrity Management (AIM) of all equipments 8. Follow design/ operating standards as prescribed by OISD 9. Prepare robust Disaster Management Plan (DMP) to deal with disasters

CGD Regulation:

PNGRB objectives: To regulate the refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas excluding production of crude oil and natural gas so as to protect the interest of consumers and entities engaged in specified

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activities and to ensure uninterrupted & adequate supply and to promote competitive markets. Why PNGRB: 1. 2. 3. 4. 5. It promotes market dynamics Protects customer interest Set up operating guidelines in business To ensure benefits of Natural resources to all Fixes network tariff and quality benchmarks

Post APM regime, the Government needed a regulator to oversee the market for CGD which started to grow with the entry of private players in the erstwhile PSU dominated market.

PNGRB regulations provide;

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Third-Party Access codes: This Access Code aims at establishing industry wide transparent and uniform principles for allowing entities to gain/ allow access to the pipeline systems and CGD networks. The present access code covers providing access to both the natural gas transmission pipelines and CGD Networks. The objective of this access code is to; 1. Promote the development of a competitive gas market by establishing uniform principles for owners and users of gas pipelines to allow transparent and non-discriminatory access to the gas pipelines and CGD networks. 2. Prevent abuse of monopoly power. 3. Ensure that a pipeline/CGD owner provides minimum service of access to available capacity on a "firm service" basis and/or on "interruptible service" basis. 4. Provide basis for resolution of disputes.

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Bibliography:

http://www.naturalgas.org/overview/history.asp http://www.hindustanpetroleum.com/en/UI/CNG.aspx http://petroleum.nic.in/petstat.pdf http://www.pm-pipeliner.safan.com/mag/ppl1210/r22.pdf http://www.pngrb.gov.in/regulation_for_cgd.pdf http://www.crisil.com/pdf/infra-advisory/4-city-gas-distribution.pdf http://www.pngrb.gov.in/draft/ACFINAL.pdf http://petrofed.winwinhosting.net/upload/P_Dasgupta.pdf http://gail.nic.in/gailnewsite/aboutus/ataglance.html http://www.eai.in/ref/fe/nag/nag.html http://economictimes.indiatimes.com/topic/natural-gastransmission-company http://cugl.co.in/t-corporateoverview.aspx http://www.bglgas.com/downloads/Envirornmental%20&%20Social %20Review%20Summary.pdf http://petroleum.nic.in/gaspricepooling.pdf http://greatlakes.edu.in/gurgaon/pdf/Pricing_of_Natural_Gas_in_In dia.pdf

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