Inter-state gas pipelines are natural monopolies

Q&A/ Proshanto Banerjee

The building of an inter-state high pressure gas pipeline has generated debate in the country. The government has started a review of its earlier decision of nominating the public sector gas company GAIL Ltd as the sole agency for setting up the National Gas Grid.

In an interview to Sambit Saha of Business Standard, GAIL chairman and managing director Proshanto Banerjee, says a single nodal agency should build the Rs 20,000 crore network.

GAIL wants it should be made the sole agency for building the National Gas Grid (NGG). What is the harm if gas transmission is opened up to multiple players?

At present, GAIL owns and operates about 5,400 km gas pipeline systems in the country. Out of this, about 3,400 km is inter-state gas pipeline system.

GAIL has embarked upon building an additional 8,000 km inter-state high pressure gas pipeline network, called the 'National Gas Grid', at an investment of about Rs 20,000 crore to provide inter-connectivity between regions, sources and markets.

GAIL is suggesting the single agency concept for the development of the NGG, which would then support several intra-state pipeline systems and CityGas distribution networks, to be developed by multiple players.

There are several key factors like operational compatibility of different sections of the pipelines, minimisation of overall transportation tariff and incorporation of a central gas management system to provide gas swap facilities, all of which are compelling reasons for development of an integrated grid by a single agency.

GAIL has studied the global experience of the evolution of inter-state, high-pressure integrated gas transmission networks. The 39 countries studied included US, UK, France, China, Turkey, Brazil and Argentina, of varying geographic sizes and market maturities.

Except USA, virtually a single agency has developed several thousand kilometres of high pressure integrated pipeline systems in all these countries.

For example, in France, which is geographically one-sixth the size of India, more than 30,000 km of high pressure gas transmission was developed, in 5 zones, as one integrated network by Gaz de France.

Therefore, in my view, we must consider the merits of developing and operating a vast and complex integrated inter-state network by a nodal agency, which has found overwhelming international favour, than adopting the exceptional US model of multiple-player, multiple-pipeline approach.

Will not a single agency lead to a monopolistic situation which is against the spirit of free market economy?

I would argue that the model of multiple inter-state pipelines would only lead to sub-optimal investment and utilisation of infrastructure, which our country can ill afford.

Moreover, under the proposed regulatory mechanism, the regulatory board will regulate the pipeline tariff, ensure fair access to pipelines and protect the interest of consumers. Therefore, monopolistic fears are unfounded.

USA has multiple inter-state pipelines - how are they surviving?

USA is an exception with more than 150 inter-state natural gas transmission companies, transporting about more than 650 billion cubic metres (BCM) of gas annually through more than 4,35,000 km of transmission mains.

In India, we are talking about transportation of less than 30BCM of gas annually and hence India cannot be compared with US. Besides, in the US, unfettered competition has led to parallel pipelines resulting in capacity underutilisation to the extent of 50 per cent in many pipelines.

To decrease cost and economise operations, the number of inter-state pipeline operators are drastically shrinking there.

At present, GAIL is transporter and in future it could well become a producer also. Would it not lead to conflict of interest?

GAIL is transporting the gas produced by ONGC and other private and joint venture producers like BG, Reliance and others. In the emerging scenario, GAIL could become a producer of gas as it has participating interests in a number of E&P blocks under exploration.

GAIL is looking at various models to unbundle the business to eliminate potential conflict of interests and to provide transparency and comfort that the market needs in a competitive situation.

The NGG is expected to cost Rs 20,000 crore? Should a single agency be entrusted for such a huge investment? Would it not make sense to distribute it among multiple players?

In the coming years, gas sector in India will witness spectacular growth. In the gas value chain, huge investment is required in the upstream E&P, midstream pipelines and downstream market utilisation.

NGG is just a part of the midstream segment, which in any case would further require investment in intra-state pipeline networks within each state and also in city gas distribution networks in multiple cities.

GAIL as a PSU is proactively undertaking the responsibility of developing the entire NGG as an essential infrastructure using its own resources.

This, in my view, would attract private investment in upstream and downstream activities, where the returns are non-regulated. As regards GAIL's financial resources, its annual resource availability for project investments is of the order of Rs 1,600 crore at a debt:equity ratio is 0.2: 1.

GAIL also has high credit rating and can mobilize project finances at very attractive terms. GAIL has high acceptance with multilateral agencies like ADB.

The development of each segment of NGG would be synchronised with the commencement of supply to target markets with paying capacity. Hence, each segment of the NGG would start generating revenues as soon as it is commissioned.

GAIL has, for more than 20 years, been implementing and operating cross country gas pipeline networks in India. In the last financial year, it implemented projects worth more than Rs 3,000 crore, with significant savings in time and cost.

How can a single operator regime satisfy the aspirations of private players with own reserves, which would naturally prefer to forge exclusive supply pact with users on its own?

I agree that the gas producers from the NELP finds would prefer to enter into gas sale agreements with gas consumers on their own. GAIL as the transporter of gas would provide open access to NGG to all players, public and private.

Already IOC and BPCL are using GAIL's Dahej-Vijaipur and HVJ pipelines to sell R-LNG that they are buying from the Dahej LNG terminal.

In fact, I feel most gas suppliers would normally be more keen on ready market access, than to build pipeline infrastructure on their own. The single-agency, integrated grid model would be preferred to a multiple-entity multiple-pipeline model.

If there are multiple lines in the same route, there would be competition with best price and service for users?

Actually, large and capital intensive inter-state high pressure gas pipelines are considered as natural monopolies and that is the reason why, world over, regulators rely on regulation rather than promotion of competition as an effective mechanism to protect interest of consumers.

The multiple-player, multiple-pipeline model has drawbacks, and can lead not only to sub-optimal return on investments but also lead to serious operational problems in efficiently managing the gas market.

NGG would promote gas-to-gas competition among gas marketing entities, and consumers would have the option to source gas from different locations and producers through the common grid.

Is GAIL comfortable with the idea of different players building different stretches of NGG as compared to multiple player in the same route?

The single agency model to develop the integrated grid is strongly favoured by GAIL. Now take the power sector, especially the transmission segment, which has striking parallel with the gas sector.

In the power sector, the government has already notified the Power Grid Corporation of India Limited, as the central transmission utility (CTU), with the responsibility of developing all inter-state power transmission infrastructure in the country.

Power Grid is at present engaged in expanding the existing transmission network of about 8,000 circle km inter-state network up to about 31,000 circle km network, as a part of the National Power Grid, at an investment of over Rs 70,000 crore.

GAIL is suggesting a single-agency concept for the NGG, based on global experience and striking similarities of the gas and power transmission systems.

How can GAIL ensure supply of gas to an user if the source is with a private player over which GAIL has no control?

In the case of the National Gas Grid, GAIL would be only the transporter. Any producer or supplier of gas would book capacity in the pipeline and pay the transportation charge for using the pipeline.

Since, the commodity, which is natural gas, is sold by the producer or supplier and not by the transporter, there is no need for GAIL as the transporter to have ownership of gas.