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Event update: Oil & Gas; New CGD bid criteria notified - Sets the stage for Ninth Bid round

EVENT

The Downstream Oil & Gas Regulator Petroleum and Natural Gas Regulatory Board (PNGRB) has notified the revised Bid criteria as a precursor to the launch of the Ninth and largest ever Bid round (86 Geographical Areas or GAs comprising >170 districts) for City Gas Distribution (CGD) in the country (https://goo.gl/JZaKt3)

IMPACT – Important changes to encourage speedier CGD penetration

The new bidding norms, formalized after extensive consultations with all stakeholders seeks to do away with Balance sheet size as a key determinant for a Bid, adding specific performance parameters and fixing minimum tariff criteria. The norms also extend marketing exclusivity period to 8 years (with a 2-year extension option) instead of 5 earlier. The intended impact of these changes is to encourage experienced players in the space to get a lion’s share of the bid. The idea is to remove additional bid bonds as the tie breaker (an important change) to weed out non-interested players (see important bid changes in Exhibit 2, 3 and 4)

Key highlights of the revised Bid Criteria

Performance parameters on the forefront: From the earlier regime of 70:30 weights for network tariff and CNG compression charges, the new criteria fixes specific targets for CNG stations, inch kms of pipeline and domestic connections as the primary bid criteria. Tariff for network and weightage of CNG compression charge has been reduced to 20% in aggregate and also a minimum amount of Rs30/mmbtu and Rs2/kg fixed for the two factors, respectively, against no base earlier. Absence of base in previous bid rounds led to all bids coming in at Rs0.01/mmbtu.

Additional bid bond no longer the tie breaker: In earlier bid rounds, in case of a tie on tariff bids (which was usually the case as every player would bid the lowest allowed bid of Rs0.01), the size of revised bid bonds submitted would end up being the sole determinant of the bid decision. This has now been changed to performance parameters being bid for, in the order of domestic connections, CNG network and finally the length of the inch kms of pipeline bid for as the tie breakers. The extent of performance guarantee to be deposited for the bid has also been fixed, depending on the size of population in the target city (Exhibit 4) versus a 4x performance bid bond in earlier rounds.

Penalty norms too have changed: Earlier penalty for non-compliance with performance milestones was fixed in the same percentage as the shortfall, ie, performance bond could be encashed to the extent of percentage shortfall. This has now changed to specific penalties of Rs750 per domestic connection shortfall/ Rs0.15mn for each inch km of pipeline shortfall and Rs2mn for each CNG station shortfall.

Marketing exclusivity changed to 8 years from 3-5 earlier: Earlier norms specified a marketing exclusivity of 3 years for an entity already operating for >3 years and 5 years for an entity <3 years old. New norms specify a longer 8-year period for all prospective bidders, with eligibility for a 2-year extension contingent on meeting performance timelines for each of the 8 years by the operator.

VIEW: An important step forward in the ’gasification journey’

We believe the changes in bidding regulations pave the way for the Ninth CGD bid round to progress quickly, with the sheer size and scale of the bid round indicating the government’s clear intent to aggressively move towards meeting their stated aim of making gas 15% of India’s primary energy mix from <9% currently. We believe the move to change the weights of bid criteria to performance parameters is positive with the change in penalty norms and extension of marketing exclusivity period to 8-10 years an additional incentive for prospective bidders. With the CGD sector accounting for less than <17% of India’s gas consumption and with mere 3 players (IGL/MGL/GGL) comprising 80% of the pie, India’s CGD sector is ripe for a sharp expansion in next 5 years.

We expect the CGD auctions would be followed by decisions on long-pending tariff orders for GSPL and Unified tariff for GAIL’s network. These measures would further incentivise the development of incremental gas transmission network in the country. We view this event as a significant positive and maintain our positive stance on CGD companies, Gujarat Gas (GGL)/Indraprastha Gas (IGL)/ Mahanagar (MGL) as well as GAIL.