Internal Audit in the City Gas Distribution Sector

The Petroleum and Natural Gas Regulatory Board (PNGRB) has authorised various CGD companies under Sections 16 and 42 of the PNGRB Act 2006 for building the required infrastructure and last-mile connectivity. Post the 12^th CGD bidding round, the majority of the population currently has access to CGD networks. As of March 2025, India has over 1.5 Cr. PNG connections and over 8000 CNG Stations, which reflects India's push toward cleaner energy and broader access.

A typical structure of a CGD network is depicted in Figure 1.

Challenges in a CGD Business

• Capital Intensive: Building a CGD network is a capital-intensive process with a long payback period. It also requires numerous clearances from multiple stakeholders before laying steel or MDPE pipeline networks.
• Gas Sourcing: India imports ≈49.86% of its total natural gas consumption. Factors like the COVID pandemic, political conflicts, global headwinds, and buoyant gas prices may erode profit margins.
• Type of Customers: The presence of industrial, commercial, household, and CNG vehicles is not equally distributed. An inadequacy of industrial and commercial customers poses a risk of lower profit margins.
• Market Challenges: Many potential users are unaware of the benefits of PNG/CNG along with uncertain demands.
• Availability of Alternate Fuel: Industrial connections are price-sensitive; historically, they have been converted from traditional sources of energy, such as furnace oil, power, coal, diesel, etc. It is quite easy to go back to the previous source in case of price escalation under global uncertainties.

City Gas Distribution Value Chain

Table 1 shows a typical representation of various points of the CGD business value chain bifurcated among the types of business.

Role of Internal Audit in Strengthening the CGD Value Chain

The CGD value chain spans gas sourcing and transmission, development and maintenance of infrastructure, last-mile connectivity, meter reading, and billing and collection. Internal Audit (IA) plays a pivotal role in identifying inefficiencies and providing assurance across each segment. A few critical dimensions highlight this:

• Gas Sourcing: Risks include an inaccurate gas nomination process and failure to secure long-term contracts for the supply of gas. IA can help in placing proper controls over the gas consumption forecast and securing supply contracts. This reduces the scope of procuring gas at higher spot prices.
• Development of Infrastructure: Two primary risks, among others, are that companies may fail to achieve the minimum number of connections agreed with PNGRB, and that they may take investment in infrastructure without ensuring gas supply. IA helps companies establish a project approval and monitoring cell that ensures the timely completion of projects with all due clearances.
• Operation and Maintenance: The average gas loss in CGD companies was ≈2.33% in FY24. PNGRB targets reducing it to below 2%. IA helps companies strengthen their operation and maintenance processes, with a focus on Supervisory Control and Data Acquisition (SCADA) of gas movement and gas reconciliation practices to minimize the quantity of lost and unaccounted gas.
• Last-mile Connectivity: There is an open pool of potential not-connected customers, which poses a risk of revenue loss due to the pending connectivity of potential customers. IA can review the process of lead management and help reduce the turnaround time for customer conversion and gas commissioning.
• Meter Reading: Depending on the type of customer, the meter reading frequency is supposed to be different, which affects the billing of gas consumption charges. With the help of data analytics, IA can establish a second check over the meter reading process. It can highlight lapses and inaccuracies.
• Billing and Collection: Risks include missed billing of all active customers or inaccurate billing. IA can help companies ensure complete and accurate billing of customers. IA can also oversee the control of security deposits and the recovery process.
• Compliance and Reporting: PNGRB is the designated authority for regulating CGD companies. It poses the risk of failing to comply with applicable regulations and reporting accurate information. IA helps management set an end-to-end compliance monitoring process.

Thus, in line with the value chain, IA can be a critical wheel in the journey of a well-governed CGD company.

Measuring What Matters: Internal Audit's Role in Driving KPAs and KPIs

To measure the efficiency of a city gas network, organizations need to define Key Performance Areas (KPAs) and track Key Performance Indicators (KPIs). Internal Audit ensures that these metrics are not just defined but also monitored with discipline, and organizations not only comply with standards but also strive for operational excellence.

Some critical areas include:

• Gas Loss: Measuring loss and unaccounted gas in the city gas network. IA ensures comprehensive reconciliation of gas inflow and outflow through accurate meter readings and near-accurate provisions for unbilled customers.
• Compression Efficiency: Achieving gas compression at the optimum cost and ensuring gas availability at all times. IA ensures that operations achieve the Original Equipment Manufacturer's (OEM) recommended level of compression loss and power consumption cost.
• Capital Work in Progress: Monitoring whether Steel, MDPE, and CNG projects are commissioned and monetized in time. IA helps the project committee with project status monitoring, including obtaining due permissions and NOCs from stakeholders. IA ensures Geographic Information System (GIS) mapping of the complete CGD network.
• Minimum Agreed Plan of Geography: Monitoring compliance with the minimum agreed plan of the geographical area as committed while bidding for authorization from PNGRB. IA strengthens the process of monitoring CGD authorization commitment in terms of last-mile connectivity. IA ensures the company commissions the targeted connections well before time.
• Health, Safety & Environment (HSE): Monitoring safety incident frequency, regulatory compliance, and waste management practices. IA evaluates whether safety protocols, training, and environmental standards are being complied with in practice, not just on paper.
• Financial Discipline: Tracking budget adherence, Return on Investment (ROI) on capex, receivable aging, and compliance with taxation frameworks. IA strengthens governance by reviewing project cost controls, tax compliance, and financial reporting accuracy.

Emerging Focus Areas for Internal Audit

As the city gas network matures and is set to achieve its target in the national energy basket, Internal Audit must look beyond the traditional way of conducting audit and align its focus with the needs of the hour. Emerging focus areas include:

• Technology and Transformation: Assessing the adoption of automation, IoT-enabled machinery, robotics, and AI.
• Cybersecurity & Data Integrity: Safeguarding personal data against threats such as ransomware and espionage by testing resilience, validating access controls, and ensuring compliance with data protection norms.
• Resilient Supply of Natural Gas: Strengthening controls to secure a continuous supply of natural gas at a sustainable price, considering available reserves, import dependency, logistics, geopolitical risks, and other contingencies.
• Evolving Infrastructure: Continuously evaluating new technologies in gas sourcing and transmission infrastructure to reduce gas transmission and compression losses.
• ESG & Sustainability: Verifying carbon neutrality targets, the use of alternative energy sources alongside natural gas such as biogas, and social responsibility programs.

Conclusion

India's city gas distribution network has been growing at a double-digit rate. This growth comes with various internal and external challenges. Internal Audit, with its unique position, provides independent assurance, actionable insights, and forward-looking advisory to help organizations navigate risks and build resilient operations.

IA not only helps in identifying gaps in the system but also aligns operations with best industry practices, innovative technologies, and regulatory compliance. For boards, regulators, and stakeholders, Internal Audit has become the conscience-keeper and value-enhancer of the enterprise.

References

• The Ministry of Petroleum and Natural Gas, report on progress to achieve the 15% target of natural gas contribution to the energy basket by 2030.
• Government of India, PNGRB, 12th Bidding round Brochure.
• PNGRB, Gas Loss Analysis and Improvement Strategy Report 2020-2024.