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Blockages in the gas pipeline revised



Petroleum and Natural Gas Regulatory Board (PNGRB) is the only statutory body for the Petroleum and Natural Gas Sector which has been constituted under the PNGRB Act, 2006 on 1st October, 2007.  Since its inception, PNGRB, inspite of various hurdles and inadequate of human resources, proceeded expeditiously to finalize and notify regulations under the provisions of the said Act through a wide structured consultation process involving all the stakeholders as well as the general public.  So far, 18 Regulations have been notified with another 5 regulations under notification, of which 8 regulations are concerned with grant of authorization, transmission tariff fixation, ensuring competition of Natural Gas Pipelines and City Gas Distribution etc.  In particular, Access Code providing for third party non discriminate access to common carrier/ contract carrier pipelines has laid the base for a competitive gas market in India for the first time.  This is supplemented by the Affiliate Code of Conduct which prohibits the regulated entities from treating their competitors less favorably than their subsidiaries.  Since these regulations are binding on the regulated entities, backed by Performance Bank Guarantee and penal provisions in the said Act laying down deterrent penalties, the Board would like to be informed as to which regulatory provisions are lacking to prevent monopolies in the natural gas sector.  PNGRB has been reiterating that it has an open mind to ensure it's commitment to create a fair and competitive market as mandated under the said Act.

There are specific issues raised and conclusion drawn with regard to transportation pipelines for natural gas in the article.  The following is a point-wise clarification on each of the issues raised in the article concerning PNGRB. 

  1. "It (East-West Pipeline of RGTIL) 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."

    This is not factually correct.  Gujarat State Petronet Limited (GSPL) is implementing the 1500 kms. Gujarat Gas Grid Pipeline network connecting Surat-Morvi-Mundra of which 1200 kms pipeline network upto Morvi has already become operational.  There are other pipelines, which are under implementation such as the 650 kms long Dadri-Bawana-Nangal pipeline by GAIL (first phase of which is going to be operational by March, 2010 and the second phase by October, 2010) and the 450 kms long Chhainsa-Jhajjar-Hissar pipeline, also by GAIL (the first phase of which is expected to be commissioned by December, 2009 with the second phase being completed by October, 2010).

  2. "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"

    Under Section 17(1) of the said Act, transportation pipelines approved by the Central Government prior to the appointed day i.e. 1/10/2007 do not require authorization by PNGRB.  The entities concerned are required to apply to the Board under Regulation 17  of the PNGRB (Authorizing Entities to Lay, Build, Operate or Expand Natural Gas Pipeline) Regulation, 2008 for acceptance of approval which RGTIL has done.   The board has not been informed by the Government as to on what basis and terms and conditions this pipeline had been approved.

    All fresh pipelines to be granted authorization by PNGRB have necessarily to go through an open competitive bidding system, with bids being decided by two criteria e.g. lowness of transmission tariff and highness of projected volume to be transported with tariff carrying a weightage of 70%.   For all such pipelines, the tariff shall be decided on the basis of the successful bid.  However, since pipelines already approved by the Central Government prior to the appointed day do not have to go through the bidding process, their tariff is required to be fixed as provided in the PNGRB (Determination of Network Tariff) Regulations, 2008 which allows for a 12% return on historical cost of capital plus reasonable OPEX. 

    It has been recognized by the Board that fixation of transmission tariff will take time as it involves detailed scrutiny of the cost data by the consultant and internally within the Board.  In view of this, all concerned entities have been advised that the tariff formula laid-down in the said regulations has come in to effect from the date of notification of the tariff regulations i.e. 20/11/2008.  The entities are required to fix tariff internally on the basis of the formula given in the regulations which is subject to adjustment when the Board formally finalizes the tariff for the pipeline.

  3. "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 EWP cost could become a benchmark"

    Under the provisions of said Act, authorization for a common carrier/contract carrier pipeline can only be granted by the Board through an open competitive bidding process.  As such, the assumption of the Analysts that the producers are going to set up their own pipeline system is purely speculative. Therefore, the question of any cost becoming bench mark in a bidding process does not arise.

    As regards existing pipelines, these have been implemented at different points of time through different terrains with varying capacity.  The cost data of each such pipeline will be subject to detailed scrutiny before transmission tariff is determined.  As such, the question of cost data of one pipeline becoming the benchmark for other pipelines does not arise.

  4. "Recently the Pipeline 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  in KG Basin"

    As pointed out earlier, grant of authorization will be decided by an open  competitive bidding  process.  GSPL and GAIL had submitted two EOIs - one connecting the Kakinada region through Central India with Bhilwara as the termination point and the other from the same region to Vijaipur respectively.  As these proposed pipelines run parallel to each other for more than 700 kms, PNGRB had referred the issue for advice to a High level Pipeline Advisory Committee which has already submitted its report.  Taking its recommendations into consideration, PNGRB has decided to invite bids for a pipeline from the Kakinada region through Central India to Bhilwara through Bhopal by combining the two EOIs.  The question of GAIL and GSPL constructing parallel pipelines does not arise.

  5.  "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"

    Obviously, the source in PNGRB is not aware of the provisions of the said Act and the regulations already notified by the Board.  As pointed out earlier, the grant of authorization for any transportation pipeline shall be decided on an open competitive bidding process.  The producers of gas can participate along with other entities who fulfills the minimum eligibility criteria laid-down in the regulations.

  6. "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"

    As indicated earlier, PAC is only a recommended body which has already submitted its report.  It is not understood as to how political pressure, if it is relevant in this context, can be brought on a national level regulatory body by a State Government.  It would be interesting to know as to why such political pressure is considered relevant when participation in the bidding process for the pipelines identified by the Board for grant of authorization depends on the minimum eligibility criteria and not on any other consideration.  Anyone with even any degree of familiarity with the relevant regulations of the PNGRB would know that there is zero discretion at any level in the bidding process and its outcome.

  7. "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 consumers interests by laying down a few rules"

    This position prevailed before the constitution of PNGRB and the notification of the relevant regulations. Under the Affiliate Code of Conduct, the entities are required to maintain separate accounts of price of gas, transportation tariff and distribution cost, for which also the tariff is determined by PNGRB.  The said Act does not provide any regulation of the price of gas by the Board.  However, under Section 11(f)(iii) of the said Act, "the Board shall in respect of notified petroleum, petroleum products and natural gas, monitor prices and take corrective measures to prevent to restrictive trade practices by the entities". Since the Central Government has not notified any product including natural gas, this responsibility cannot be carried out by the Board.

  8. "..his solution to stop the fragmentation of the market into different monopolies. The government must mandate that at least two trunk pipelines should connect"

    All transmission pipelines have to connect with each other in order to be commercial viable.   As a matter of fact, PNGRB has been pro-active in development of a National Gas Grid connecting all sources and all consuming centre across the country.  In order that the National Gas Grid consisting of a number of transporters functions smoothly and efficiently, the Board is at an advance stage of finalizing a National Gas Grid Management Centre to regulate dispatch and transmission from various sources to consumers across the country.

  9. "..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"

    This assumption is factually not correct. As pointed out above, this has become a reality in the ground. The new pipelines being authorized by the Board do take into the consideration their linkages to other major pipelines and regional networks.  In many cases, the regulation for connectivity is already provided under the Access Code.

  10. ".Even interested in ensuring transparency and competitiveness int eh gas sector"

    Section 11(a) mandates that the Board shall ensure 'fair trade and competition amongst entities'.  All the regulations of the Board, finalized through a wide and structured consultative process are designed to ensure this objective and has adopted best international practices relevant to this country so as to create a efficient and competitive natural gas market.  The Board recognized that since it is the first time that such regulations are being introduced, the Regulatory Framework will undergo gradual evolution as the infrastructure develops and the market matures.  Any suggestion with regard to improving the Regulatory Framework would certainly be welcome and considered by the Board seriously.