The Union cabinet is expected to soon consider the oil ministry’s proposal to hive off state-owned GAIL’s pipeline business into a separate entity, which is expected to be considered for a strategic sale at a later date.

The ministry, as part of the unbundling of GAIL, has suggested that two entities be formed — one with marketing operations and the other, the pipeline company.

GAIL’s core business after the bifurcation would be the marketing of natural gas and petrochemicals production.

It will have to hire capacity in pipelines from the subsidiary and pay regulator-approved tariff on the same.

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

Oil ministry officials said selling of the pipeline subsidiary to a strategic investor 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 build a national gas pipeline grid.

After the cabinet approves, a consultant will be appointed to transfer the pipeline business into a separate subsidiary. This would take 8-10 months to accomplish. The government has a 54.89 per cent stake in GAIL India.

Big share

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

The government had recently approved a viability gap funding for a gasgrid in the northeast 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 LNG terminals after the split.

The firm 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.

GAIL operates around 12,200 kilometres of natural gas and 2,038 km of LPG pipelines across the country, and is investing more than Rs 45,000 crore to expand its network. In 2018, the company also allowed third parties to hire its pipeline for transporting natural gas.

The country's biggest natural gas marketing and trading firm and owns more than two-thirds of the country's 16,234-km pipeline network, giving it a stranglehold on the market.

The average gas transmission rose to 107.43 million metric standard cubic metre per day in 2018-19 from 105.23 mmscmd in the previous financial year.

The unbundling has been a necessary precondition to setting up the exchange to prevent the risk of conflicts of interest for GAIL owing to its potentially having monopolistic control as the gas distribution pipeline network operator and operating as a gas trader at the same time.

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.