Strange story of the eastern gas grid

In an open market scenario, competitiveness of industry is best determined by access to different energy options, which includes optimal delivery cost as well. The idea is to grant liberty in exercising different options. The western States have been luckier than the east in this regard.

Gujarat is blessed on this count, thanks to its sprawling gas infrastructure alongside other options. The east, on the other hand, has no gas (except of course small quantities of coal-bed methane) and is dependent on cheap coal supplies by the state monopoly. So when the coal crisis struck at the end of the last decade, industry had few choices to fall back on.

From this perspective, there is every reason to support the Centre’s latest push to create gas infrastructure in the east.

The concern, however, is that by acting in haste, the Government is bypassing the regulatory regime and the competitive bidding route. That may give rise to monopolies, which is not in consumers’ interest.

State-owned GAIL is to build a ₹13,000-crore eastern grid, referred to as the Jagdishpur (UP)-Haldia (Bengal) and Bokaro (Jharkhand) -Dhamra (Odisha) Pipeline (JHBDPL) project, with 40 per cent (₹5,176 crore) viability gap funding from the Centre.

Jagdishpur is the terminal point of the HVJ pipeline that connects the Hazira terminal in the West Coast. GAIL has also been asked to build city gas distribution (CGD) networks in seven cities, including capital cities en-route, “in collaboration with the State governments”. The entire transmission and distribution network will be built outside the scope of regulation, where the Petroleum and Natural Gas Regulatory Board (PNGRB) invites bids against the proposed project and the award goes to the lowest bidder.

GAIL and state-owned Indian Oil will put up an LNG terminal in a 50:50 joint venture with the Gujarat-based infra major Adani group at Dhamra. Considering the shortage of domestic gas, this is apparently the sourcing point of gas for the region.

While there is little clarity on the Odisha and West Bengal leg, piecemeal information suggests it would be a triangular grid connecting the Dhamra terminal with Haldia and Gaya (Bihar), on the Jagdishpur-Haldia route.

The huge investment will be justified by reopening closed fertiliser facilities at Gorakhpur (UP), Sindri (Jharkhand) and Barauni (Bihar) through public sector funding. Cash-rich state-owned energy majors Coal India and NTPC are being asked to invest in fertiliser plants.

It is surprising how the boards of a coal miner and electricity generator agreed to invest in such an unrelated area.

It’s a case of centralised planning where state-owned companies play ball with chosen private sector partners. The design is not new. Over the last two years, state-owned oil and gas marketing companies have entered into JVs with chosen private sector partners for two LNG terminals in Gujarat.

But centralised planning has taken a wider shape in the case of the east, as it grants a near-monopoly status to the Adani-IOC-GAIL trio in energising the entire region. And that raises serious questions.

First, it is not clear if Adani will have long-term gas sourcing agreements. Their upcoming Mundra terminal in a joint venture with GSPC is expected to start operating in 2018 on a spot basis.

Though LNG prices have tumbled since January 2014, opening doors for long-term deals, India has failed to take any advantage of this development. Gas prices are likely to remain under pressure for the next two years. It has to be seen what model is adopted for the Dhamra terminal. The price of gas is crucial as it is a pass-through, being reflected either in fertiliser subsidy or consumer outgo.

Second, there is little regulation of CGD tariff today. Top players are enjoying the twin benefits of rising volume and increasing margin per cubic metre of gas.

Third, the existing pipelines in the country were conceived before the regulator came into being in 2010. A comparative study will prove PNGRB awarded projects are of relatively lower cost.

It is true that some of the projects were awarded at abnormally low costs. But, there are also examples to suspect cost ‘gold plating’ in the pre-PNGRB period. Higher cost means higher transmission revenue.

Finally, since there has been no competitive bidding, the decision of 40 per cent state funding looks arbitrary. There is no way of knowing if someone could have executed the project at lower costs, eliminating or reducing the scope of viability-gap funding. Four companies — including three from the private sector — recently bid for the Haldia-Paradip pipeline proposed by the Hiranandani group. The bidding was cancelled by PNGRB but it proved that there was adequate interest in investing in the east.

A GAIL press release claims implementation of the plan would see investment of nearly ₹51,000 crore ($7.7 billion) in the east in fertiliser plants, LNG terminal and pipeline infrastructure.

But why is the Government in such a hurry? The economic reason, as Petroleum Minister Dharmendra Pradhan often elaborates, is exploiting the opportunities thrown open by low prices and making India investment ready.

He is not wrong. India should boost gas usage, which is well below the global average. But, what about making better use of existing infrastructure, created at a huge cost?

While GAIL’s pipeline capacity suffers from low usage (35-40 per cent), the well-connected Dabhol terminal, operated by NTPC-GAIL JV, remains closed for six months for lack of a ‘break-water’ that costs barely ₹1,000 crore. The fact is, JHBDPL and Dhamra have political implications at least in two States, UP and Odisha. The Prime Minister laid the foundation stone for the Gorakhpur fertiliser plant in July. The BJP is expecting reasonable improvement in project implementation before UP goes to the polls next year. Odisha, where Navin Patnaik’s BJD is in power for the fourth consecutive term, will go to polls in 2019 along with the general election.

The Government has set a three-year timeline for the entire project. This is too stiff. Right of way for pipelines looks easy on paper but is not so in reality. But even if the pipeline comes up, the stipulated time for an LNG terminal is 40 months. Fertiliser plants are likely to suffer delays. So far, the projects have seen zero progress.

The plan may undergo legal scrutiny. PNGRB norms say projects conceived after September 2010 should pass through its framework. The Centre bypassed this riding on a 2007 cabinet approval for the Jagdishpur-Haldia pipeline.

Will PNGRB consider JHBDPL and Jagdishpur-Haldia as the same project? The challenge may come from Hiranandani that recently raised a similar issue with regard to the Paradip-Durgapur LPG pipeline of IOC in the legal forum. Hiranandani is setting up an LNG terminal in Haldia and is awaiting re-tendering of the Haldia-Paradip pipeline as promised by the PNGRB in its August order. Gas wars of another kind?

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