Oil Ministry moves Cabinet note for splitting GAIL; pipeline business may be sold later

The Oil Ministry has moved a cabinet note seeking approval for hiving off state-owned gas utility GAIL (India) Ltd's pipeline business into a separate entity for a possible sale to a strategic investor at a later date, sources privy to the development said.

GAIL is India's biggest natural gas marketing and trading firm and owns more than 70 per cent of the country's 16,981-km pipeline network, giving it a stranglehold on the market.

Users of natural gas have often complained about not 'fairly' getting access to GAIL's 12,160-km pipeline network to transport their fuel.

Sources said to resolve the conflict arising out of the same entity owning the two jobs, bifurcating GAIL is being considered.

GAIL's core business after the bifurcation would be the marketing of natural gas and petrochemical production. It will have to hire capacity on pipelines from the subsidiary and pay regulator approved traffics for the same.

It will continue to execute the gas sales agreements it has already signed and will be responsible for the discharge of the obligation under purchase pacts including for import of LNG.

The Ministry last month floated a note for consideration of the Union Cabinet for transferring the pipeline business into a 100 per cent subsidiary.

The proposal involves separating the accounts of the pipeline division as well as transferring employees directly connected with the pipeline operations to the new subsidiary, they said adding a suitable name for the subsidiary is being mulled over.

The Cabinet, they said, is likely to consider the proposal shortly.

After the Cabinet approval, a consultant will be appointed to transfer the pipeline business into a separate subsidiary. This would take 8-10 months to accomplish.

Sources said the pipeline subsidiary may be sold off to a strategic investor but the sale is not likely before 2022 as the thinking in the government is that the gas market will not be mature before that and state support would be needed for GAIL to accomplish building a national gas pipeline grid.

The government had recently approved viability gap funding for a gas pipeline grid in the North-East which a consortium comprising GAIL and other state-owned firms will be executing.

GAIL will continue to own the marketing business as also the stakes in liquefied natural gas (LNG) terminals after the split, they said.

Previously, the government was considering transferring marketing business into a separate subsidiary for a sell-off at a later date but now a hive off of the pipeline business is being considered.

GAIL has multiple long-term contracts to import gas in its liquid form (LNG) from countries such as the US and no strategic buyer would like to take the responsibility of those, particularly when the fuel is available at a cheaper price in the spot or current market, the sources said.

They said it is now being considered that GAIL continues with the marketing business that would include all the sale contracts as also city gas retailing.

Post-2022, the pipeline business can be sold to a strategic investor such as Canadian asset management company Brookfield that recently bought a 1,480-km pipeline owned by Mukesh Ambani's Reliance Industries (RIL).

The sources said the strategic partner will operate the pipelines and give access on a non-discriminatory basis to any entity wanting to transport gas either from a natural gas field or an LNG import terminal to consumers.

GAIL already keeps separate accounts for its gas pipeline and marketing businesses, making it easier to split them into two entities.

By unbundling GAIL and opening the sector, the government hopes to increase gas use to 15 per cent of the energy mix by 2030 from current 6.2 per cent.

When talk of splitting first started in January last year, Oil Minister Dharmendra Pradhan had stated that GAIL should focus on laying pipelines, suggesting hiving off the marketing business.

Incorporated in August 1984 by spinning off the gas business of ONGC, GAIL owns and operates over 11,500-km of natural gas pipelines in the country. It sells around 60 per cent of natural gas in the country.

The sources said the oil ministry has not been very happy with GAIL's performance in building the pipeline network. Besides, there is a possible conflict of interest in its role as an infrastructure provider and carrier.

GAIL did not start executing the Rs 12,940 crore Jagdishpur-Haldia and Bokaro-Dhamra pipeline until the government agreed to give 40 per cent of the project cost as a grant from the budget. The pipeline takes the gas to Prime Minister Narendra Modi's constituency, Varanasi.

Plans to split the company had been discussed more than a decade back too but these did not materialise.

The sources said refiners Indian Oil Corp (IOC) and Bharat Petroleum Corp Ltd (BPCL) had in 2017 evinced interest in acquiring GAIL to expand their gas marketing business.

GAIL also owns a petrochemical plant at Pata in Uttar Pradesh.

The company had in the past resisted the split on grounds that it's gas marketing and transmission businesses operate at arm's length and hence do not need to be separated.

GAIL's marketing business formed 76 per cent of its 2018-19 total sales and about 30 per cent pre-tax profit.

The government has a 54.89 per cent stake in GAIL India.