India: PNGRB Cancels Gail's License to Build Surat-Paradip Natural Gas Pipeline

Petroleum and Natural Gas Regulatory Board (PNGRB) has cancelled GAIL’s license to build Surat-Paradip natural gas pipeline and ordered encashment of its performance bank guarantee after the state firm failed to make progress on the project six years after obtaining license.

PNGRB, the downstream regulator, had authorised GAIL to lay Surat-Paradip pipeline in April 2012. After GAIL failed to submit its project funding plans for years, the regulator penalised the state firm by ordering encashing of a quarter of its Rs. 20-crore performance bank guarantee in September 2015.

GAIL’s challenge of the regulator’s order was dismissed by Delhi High Court in April 2017, following which Rs. 5-crore of bank guarantee was encashed. The regulator also directed GAIL to replenish this amount as bank guarantee and quickly submit financial closure plan for the project.

GAIL then submitted a financial closure report, which was accepted by PNGRB. On 18 January this year, PNGRB wrote to GAIL intimating that its financial closure plan has been accepted and the state firm must replenish within 15 days the Rs. 5-crore guarantee already encashed, failing which the balance amount of Rs. 15-crore would also be encashed and license to lay the Surat-Paradip pipeline terminated. In response, GAIL argued that since its financial closure plan has now been accepted by PNGRB, the latter should consider restoring the Rs. 5-crore guarantee amount. On 20 February, PNGRB again wrote to GAIL asking it to explain in a week why its license not be cancelled for not meeting the previous directive.

“Considering that enough time and chances have already been provided to GAIL for making good the encashed performance bank guarantee amount of Rs. 5-crore, and also the ground progress made in implementing Surat-Paradip pipeline project is nil after about six years from the date of authorisation,” the PNGRB wrote in its recent order, concluding that GAIL had failed to perform its obligations.

“Thus, action under the provision of Regulation 16(1)(c) be taken for encashment of the balance performance bank guarantee amount of Rs. 15 crore and authorisation of GAIL (India) Ltd. for Surat-Paradip Natural Gas Pipeline project be terminated,” the PNGRB wrote in the order.

Lower domestic gas production and consumption has kept gas pipelines largely underutilised across the country for the last many years, a key reason why gas companies haven’t been too excited about building new gas pipelines for which they had obtained licenses years ago. Companies must build pipelines within a reasonable period or must give up their claim, else they are likely to be seen as squatters and get their licenses terminated.