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FEB. 11, 2007
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Taxing Times
The phase-out of central sales tax is yet another move towards ushering in the national goods and services tax (GST). The compensation to the states, in lieu of CST phase-out, will include revenue proceeds from 33 services currently being taxed by the Centre as well as 44 new services of an intra-state nature that will be traded by the states. However, VAT is the way forward, though much needs to be done to iron out the anomalies in the current VAT regime.

India, Ahoy!
Indian investments overseas are growing and how. For instance, total Indian investment in Latin America and the Caribbean has topped $3 billion (Rs 13,500 crore) so far. The latest investment is by ONGC Videsh, which acquired an oilfield in Colombia for $425 million (Rs 1,912.5 crore). Earlier, ONGC bought an offshore oilfield in Brazil for $410 million (Rs 1,845 crore).
More Net Specials
Business Today,  January 28, 2007
Gas Gets Going
For five years now, energy companies in India have been striking record gas but with no pipelines to carry it to consumers. But with the new pipeline policy in place, gas is about to take off. It will need help, though.
Road ahead: Infrastructure is the key challenge to ferry gas across the country
Early this month, the government decided to rush through a gas pipeline policy, ahead of the soon-to-be-born regulator. Rushed, for the regulator is well empowered to do the same. But the urgency is understandable-domestic gas finds in the last five years, estimated at 20 trillion cubic feet, need to reach the market through pipelines that will criss-cross the country. Says petroleum secretary M.S. Srinivasan: "Exploration companies need to recover their investments by selling gas to consumers." Consumers, too, are hungry for gas, with supply at a mere half of the prevailing demand. Pipelines, therefore, are a critical infrastructure to meet the energy demand.

The recently announced pipelines guideline is a straight invite for natural gas producers and LNG suppliers to set up trunk route pipelines; in fact, it excludes those who don't have a supply source. So the current list of companies that can build pipelines is a short one: Reliance Industries from the private sector and ONGC, Gujarat State Petroleum Corporation and Petronet LNG from the state sector. This list is sure to grow in the short term given the high prospects of finding gas in the country and the ongoing aggressive exploration programme along its eastern coast. With all this pointing to a trebling of gas supplies over the next few years from the current supply of 91 million standard cubic metre per day (see Piping Hot), the question is: how big is the business of building pipelines?

Even the conservative estimates are huge. Government officials say $4 billion (Rs 18,000 crore) could be invested over the next five years because as of now pipelines for transporting gas to industrial and domestic users are almost non-existent. Currently, there is a single 6,000-km network linking the Mumbai High gas fields of ONGC to northern India, owned by GAIL (India), the public sector gas transmission and marketing company.

While the supply side is swelling, so is the demand, argues the government. It estimates that demand too will vault, resulting in marginal deficits during the next five years.

That said, the growing energy needs of the country, given the robust economic growth of 8 per cent per annum, is not reason enough for optimism.

Why? First, big consumers like the power sector (which currently consumes 37 per cent of the total gas supply) have suffered at the hands of the gas suppliers who failed to deliver in the past. As a consequence, the power ministry is estimating a mere 2,000 mw of gas-fired capacity addition in the country during 2007-12, out of a total capacity of 68,000 mw.

Says power secretary R.V. Shahi, "We cannot be dependent on a source of fuel supply where price and quantity are not secure and competitive. Currently, 4,000 mw of capacity worth Rs 16,000 crore is idling due to shortage of gas". Secondly, the absence of infrastructure to ferry gas to the demand centres across the country is proving to be a hurdle and regulation is barely evolving. Hence, industry is not yet betting on this fuel.

And, therein lies the challenge for the gas producers and marketers.

Search for Markets

Mukesh Ambani: Gets the nod
Gas distribution is a business where infrastructure (pipelines) precedes the development of the market because obviously pipelines are needed to reach the gas to consumers. Hence, Reliance Industries (RIL), which has found a 10.6 trillion cubic feet gas reserve in the Krishna Godavari basin, is in the process of laying a 1200-km, Rs 15,000-crore pipeline to Gujarat (see Gas Highways). The construction could not have begun earlier since it had to dovetail with the development of the gas field, which was discovered in 2002.

On the marketing front, the key to a successful gas distribution business lies in creating a basket of consumer segments, led by cherry picked (on the basis of creditworthiness) bulk consumers. Not surprisingly, RIL has chosen to tap a market which is starved of gas (Andhra Pradesh), besides another that is in the throes of re-industrialisation (West Bengal).

Over the last two months, RIL officials have been flying in and out of Hyderabad, negotiating to sell gas to the state worst hit by the prevailing gas shortage situation. Says Andhra Pradesh chief secretary J. Harinarayan, "We are in talks with Reliance. Though, it is at a preliminary stage".

Another low hanging fruit is the clutch of industries, including fertiliser plants that operate on expensive alternate fuels like Fuel Oil and Low Sulphur Heavy Stock (LSHS). Currently, as much as 13 million tonnes of these two comparatively expensive fuels are consumed annually.

For GSPC, the transportation of gas has been made easier by Reliance-the former is piggy-backing on the Reliance pipeline's spare capacity. Marketing too involves far less effort, since it has a large distribution network across the state. Says D.J. Pandian, Managing Director, GSPC: "We have contracted capacity in the pipeline that Reliance is laying from its kg basin fields to Gujarat".

It remains to be seen whether ONGC, which has so far relied on GAIL to market its gas, will step into the gas marketing business. Says ONGC Chairman R.S. Sharma: "We have to deliberate on this issue."

A common thread running among the big marketers is one of doing business with government. The reason is simple. Bulk consumers-power and fertiliser units-secure their payments through the government. In the case of power generators, except in the case of two states and two cities (Delhi, Orissa, Mumbai and Ahmedabad), power distribution companies are state-run; in the case of the fertiliser business, production units are compensated by the government through the retention pricing scheme.

As for targeting non-bulk consumers-retailing of gas for transportation and cooking purposes-the private sector is waiting for regulation to mature. For instance, global major British Gas has a foreign investment approval from the government to enter into city gas distribution projects in the southern states of Andhra Pradesh, Karnataka and Tamil Nadu. Company officials, however, point out that they prefer to wait for the rules of the game to be framed by the regulator.

Clearly, the bottom line in the gas marketing business is no different from that in any other business-to beat the alternate cost of supply. This, in a sense, will prove to be an extremely competitive benchmark for gas suppliers. Domestic coal will not be easy to displace or complement. Here's why: For those producers, who have captive coal mines, say, steel producers, their existing low-cost structures will turn away any gas supplier. While those who enjoy a supply contract from the near-monopoly state-owned Coal India, the regulated pricing of coal (close to half of international prices) makes bulk gas suppliers uncompetitive.

Role of the Regulator

ONGC's Sharma: Stepping into gas marketing?
Before the government passes the baton of control to the soon-to be-established regulator, Petroleum and Natural Gas Regulatory Board, which will be entrusted with the principal task of regulating pipeline and city gas distribution businesses, it has set the tone for pipeline regulation via the recently announced policy. The policy says only those with a source of gas can set up a trunk pipeline. The fallout: GAIL, which, till recently, was a nearmonopoly in the trunk pipeline business, will now virtually be unable to set up a new pipeline. More interestingly, while Mukesh Ambani-controlled RIL has been given the go-ahead to set up a pipeline linking the kg basin to Tamil Nadu, his younger brother, Anil Ambani has not yet obtained approval for setting up a pipeline to Reliance Energy's 7,000 mw power plant in Dadri, Uttar Pradesh, since gas supply for it has not been firmed up.

Petroleum ministry officials, however, say that the policy of allowing pipelines to be built only by those with a gas source is not a constraint but a sweetener. There could be merit to that view. Attracting investments in the pipeline business is a difficult task since returns are regulated and gas supplies in the global markets are scarce. Hence, the bias towards those having a supply source is understandable because otherwise, it can lead to mushrooming of squatters and non-serious players. This, of course, comes at a cost-it restricts competition in the pipelines business.

There are other hitches too. Although the demand for retail gas is small compared to industrial demand-Delhi is estimated to account for just around 2-3 million standard cubic metre per day-the lure of the retailing business is enormous because the tariffs realised will be higher than that in the bulk supply business, akin to the power distribution business. But no private investment will be forthcoming before the regulator sets the rules for the business and that could take another year.

That said, industry's views on regulation are quite polarised. Domestic companies like Reliance and Indian Oil Corporation are keen that competition must be allowed in all segments of the business-in both creation of pipeline networks as well as marketing gas. In contrast, multinationals like BG and Shell have sought a monopoly regime in the marketing segment for a few initial years to ensure viability of their businesses. How the regulator reconciles these interests will be watched avidly. But the key to kick-starting the commercial use of gas and development of the market for it will be the creation of pipeline networks. Expect to see not just gas but a lot of action in the coming months.

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