Lack of transparency in pipeline projects and the absence of regulations to prevent monopolies are marring the gas market.
It is the only major natural gas infrastructure to have come up in recent times, a 1,375-km pipeline that connects the biggest gas field in India to the industrial hub of Gujarat. The Kakinada-Hyderabad-Uran-Ahmedabad link, better known as the East-West Pipeline or EWP, is a vital trunk pipeline that carries gas from the Krishna-Godavari Basin to consumers in several states, but like everything involving gas, the EWP is as controversial as it is costly. And it raises critical questions about policy and regulation of this energy resource.
To start with, there is the murky origins of the project which was hotly fought over by GAIL India and Reliance Gas Transportation Infrastructure Ltd (RGTIL) before it was awarded to the latter. Were bids invited for this project? Was it awarded on the basis of lower tariffs that RGTIL had quoted? There is no official explanation on this. Moreover, there is controversy over which of the two contenders had quoted a lower tariff. GAIL had claimed at the time that it had offered a cheaper tariff and had made its dissatisfaction public when the project slipped out of its hands. That was in 2004 when RGTIL was part of Reliance Industries Ltd (RIL) — it was transferred to a company owned by RIL chairman Mukesh Ambani in 2006 at a cost of just Rs 5,00,000 — and long before GAIL had entered into a partnership on city gas projects with oil refining giant.
The project that was awarded to RGTIL, presumably on the basis of its quoted tariff of 48 cents per million British thermal units (mmBtu), has now come before the Petroleum and Natural Gas Regulatory Board (PNGRB) for approval on a cost-plus formula. This allows the developer to recover his costs fully and then make a fixed percentage (12 per cent in the case of gas pipelines) as profit. The completed cost of the EWP is Rs 17,950 crore, a whopping figure, according to some industry estimates. This works out to Rs 13 crore per km of the pipeline project, way above the Rs 6 crore per km that the Ministry of Petroleum and Natural Gas (MoPNG) believes should be the cost of such projects. The Rs 6-crore figure has been cited by MoPNG secretary R S Pandey in public forums.
The tariff that RGTIL is now charging has soared to $1.25 per mmBtu, making it a cool 30 per cent of the price charged for gas from RIL’s D6 field. The oil ministry and RIL remain tightlipped about the costs and the steep escalation in pipeline tariff. Repeated queries to Pandey have failed to elicit any response on what basis the project was awarded to RGTIL in the first place. As for the company, a spokesman for Ambani said he was unwilling to have a discussion at this stage.
The curious part is that GAIL had offered a tariff of 39 cents per mmBtu, based on what a former official at the state-owned undertaking says was the pipeline tariff quoted by RGTIL for supply of gas to NTPC’s Kawas and Gandhar power stations. In a press statement issued in 2004, GAIL had complained that since the Kakinada-Uran pipeline would be a common carriage facility, “all customers, big or small, en route drawing their gas supplies from the KG basin are entitled to a competitive tariff and should not be burdened with a 16 per cent higher tariff.”
Meanwhile, the regulator has appointed a consultant to examine the costs and tariff proposals presented by RGTIL, very specifically to verify “the appropriateness/reasonableness of the Capex and Opex costs in the tariff computations” based on the technology, design philosophy, construction methodology and operating parameters that were used.”
The higher pipeline tariff, along with the marketing margin that is being charged by RGTIL, has been a sore point with buyers of D6 gas. All of them, from private fertiliser producers to public sector power plants, have been involved in a stand-off with RGTIL since early this year. This makes the ministry’s studied silence on the EWP extremely puzzling.
Analysts point out the lack of transparency on this issue would have wider implications. Not only is RGTIL scheduled to add another 8,000 km of pipeline across the country, other gas producers, too, are setting up their own pipelines and the EPW costs could become a benchmark.
Recently, the pipelines advisory committee of PNGRB, gave the green signal for a parallel pipeline to be constructed by Gujarat State Petronet Ltd (GSPL), a subsidiary of the state-owned Gujarat State Petroleum Corporation (GSPCL), which also has struck gas of in KG Basin. GSPL’s pipeline will run from Mallavaram (Kakinada) via Warangal, take in Wardha, Nagpur, Indore and Ratlam before joining GAIL’s HBJ pipeline. A third major from the east coast is that of GAIL which wants to build a pipeline from Kakinada to Bijaipur via Nagpur to connect with its HBJ. Approval for the last, however, has been put on hold.
Sources at the PNGRB agree that there is nothing in the regulations to prevent all three producers on the eastern seaboard, that is, RIL, ONGC and GSPC, from laying their separate pipelines. Although the advisory committee is said to be examining the capacity that is being created before recommending new pipeline projects, the lack of clear-cut regulations and political pressure, as from the Gujarat government, will force the board to be accommodating, according to the industry analysts.
The more serious consequence is that monopolies could become entrenched in India’s nascent gas market as each source of gas becomes a monopoly by itself. Industry experts say that in the initial stages of developing a gas market, producers may offer bundled services that include the gas, its transmission and marketing, making vertical monopolies almost inevitable. But the government can guard against such consolidation which goes against consumer interests by laying down a few rules.
Says T N R Rao, former petroleum secretary and expert on the oil and gas industry: “With each pipeline from a gas source becoming an island of monopoly, it makes it impossible to arrive at what the market price really is. And no formula will help us arrive at the market determined price if, indeed, the government really does want to do so.”
His solution to stop the fragmentation of the market into different monopolies: The government must mandate that at least two trunk pipelines should connect. So trunk pipelines from every source (KG Basin, Panna-Mukta-Tapti, Ravva, etc) should connect with at least one other so that monopolies are broken and buyers have the choice of getting their gas from different sources. The current policy does not insist on such interconnections but Rao feels this loophole should be plugged forthwith and that the rule should apply to all sources of energy be it coal bed methane, LNG or imported gas. That, agree most experts, would help in the discovery of competitive prices.
Ultimately, the only solution is unbundling as in the power sector. So far, there is no indication that officialdom is applying its mind to this issue — or is even interested in ensuring transparency and competitiveness in the gas sector. The blocks in the pipeline thus appear formidable.
