GAIL in two minds over govt's plan to split gas pipeline business

The government plans to unbundle the pipeline company into two to avoid conflict-of-interest issues but the state-owned major wants to retain control of both businesses

The primary job of GAIL is to lay gas infrastructure, marketing can be done by anyone.

When Petroleum Minister Dharmendra Pradhan stated this in early 2018, he was echoing a decade-old question that many industry experts had been asking. Is there a conflict of interest in the gas sector when the same entity that is responsible for transporting natural gas via a national pipeline grid should also be responsible for marketing it?

The Narendra Modi government is likely to inch closer to a plan to unbundle the gas transmission and marketing business of GAIL by the end of this financial year. The company has already appointed EY as a consultant for the exercise.

“As far as GAIL is concerned, there is definitely some element of conflict of interest. But it is a diversified entity now with petrochemical coming into the fold. If the business is split, the government could sell its marketing business to a state-run entity, as planned earlier, to meet the divestment target. In that case, the petrochem business should ideally be part of the marketing arm,” said R S Sharma, former chairman of Oil and Natural Gas Corporation (ONGC).

Recently, ideas of hiving off the pipeline business and selling it to a strategic investor had also been considered.So why the split? Based on the Petroleum and Natural Gas Regulatory Board (PNGRB) Act of 2006, companies like GAIL had to provide mandatory open access to its gas pipeline infrastructure on a non-discriminatory basis at transportation rates determined by PNGRB. This is known as the common carrier principle.

The Act also stipulated that marketing and transmission functions should not be performed by the same entity, to preclude the issue of conflict of interest. This is mainly because those involved in marketing will be able to accord priority to their own product. In the past, in fact, there have been complaints from even global energy majors of not being able to access to GAIL networks. "We have an online open access facility in place, which is transparent and hassle free. Hence, the question of allegation of monopoly or conflict of interest will not stand," a company official countered.  

Based on the latest data available with the Petroleum Planning & Analysis Cell (PPAC), of the 16,324 km natural gas pipeline network in India, GAIL accounts for 70 per cent or 11,411 km, giving the state-run entity a market monopoly. Gujarat State Petronet and Reliance account for 16.5 per cent and 11 per cent of the remaining pipeline network. According to a regulatory source, the capacity of utilisation of these pipelines is still 40-45 per cent. The drop in international liquefied natural gas (LNG) prices was reportedly pinching the company, because it was buying the gas at a higher contracted price and selling it at a lower price in the domestic market. This means a major dent in the company's earnings due to long-term contracts. 

GAIL's management has been pushing for the creation of a separate subsidiary — with a separate management and arms-length independence — for the marketing business, rather than giving it to another company, a senior GAIL official said. Experts highlight that despite the legal requirement, GAIL only split the accounts of the two divisions rather than spinning one of them off.

Sources added that an alternative plan was also submitted before the government by the management in June, the details of which is not available in the public domain. B C Tripathi, who was chairman and managing director till July 31, told Business Standard, “Though reforms are necessary, it should not be a knee-jerk reaction. Only GAIL is investing in pipelines now in India, to the tune of around Rs 50,000 crore. We need to create infrastructure and demand too. For that the company needs a strong balance sheet.” He added that evaluating the LNG long-term contracts will not be wise, as it was a decision taken five years ago. “We have already renegotiated all those contracts,” he added. 

So what's the broad plan now? The ministry of petroleum and natural gas is likely to float a Cabinet note soon for a natural gas trading hub, while GAIL and ONGC are likely to take equity in the planned gas exchange, which is a part of this hub. Petroleum ministry sources said the gas hub is likely to come in place after the bifurcation of GAIL. 

When asked about this plan, Fatih Birol, executive director of International Energy Agency, said, "If there is enough volume to be imported and if they are looking at the geographical advantage of India, with lot of demand centres and production centres with enough volumes, it should be a good candidate for becoming a gas hub. But it shouldn't be if the volumes are not significant." Based on government estimates, natural gas production is expected to be at 71.92 billion cubic meter by 2021-22, from 35.07 BCM now.

According to the PPAC, of 4,781 MMSCM (million metric standard cubic meters) natural gas available for sale in India in June, around 57 per cent is met through LNG imports. “The potential for GAIL as a company will always be there as the country is planning to increase the share of natural gas in the overall energy basket from 6 per cent to 15 per cent by 2022,” the company official said.

For the time being, however, the question whether GAIL will maintain its identity or be unbundled this year still remains.