India’s gas distribution regulator expects companies including Reliance Industries Ltd. and GAIL India Ltd. to invest 1 trillion rupees ($21 billion) in the next five years to build pipeline networks connecting cities.

The Petroleum and Natural Gas Regulatory Board invited bids for eight areas in July and plans to hold monthly auctions for another 305 cities, Chairman Labanyendu Mansingh said in an interview at his office in New Delhi. Pension funds and hedge funds are interested in buying stakes in companies building the networks, he said, declining to name the potential investors.

“We are working closely with state governments to ensure these projects come up on time,” Mansingh said yesterday. “India has been fortunate enough to have major gas discoveries and this trend is going to continue for several years.”

The government is encouraging households, factories and vehicle owners to switch to the cleaner-burning fuel from coal and diesel to reduce pollution. The auction is India’s third. The board first awarded rights for six cities last year while the second for seven cities was stalled due to a lawsuit.

Building distribution grids in a typical large Indian city may cost as much as 25 billion rupees, Mansingh said.

Manoj Warrier, a spokesman for Reliance, didn’t immediately reply to an e-mail seeking comment. R.K. Goel, finance director at GAIL, didn’t immediately comment.

Underlying Logic

“The underlying logic to this is that there’s established demand and there will be supply of gas,” said Tony Regan, a Singapore-based consultant with Tri-Zen International Ltd. who formerly worked in the gas industry with Royal Dutch Shell Plc. “This investment is just about what India needs to tap that demand and expand the existing distribution network.”

Reliance, India’s biggest gas producer, GAIL and Indian Oil Corp. bid in the first auction, the regulator said in June last year. Mumbai-based Reliance won the right to sell compressed natural gas for automobiles and piped gas for use in homes in two cities in Andhra Pradesh state and one in Madhya Pradesh, the Economic Times reported Aug. 28.

The third auction started July 23 and companies have until Nov. 12 to submit bids for eight areas in the states of West Bengal, Gujarat, Punjab and Haryana, according to a notification on the regulator’s website.

Reduce Emissions

India seeks to reduce tail-pipe emissions from vehicles and burn lesser coal to cut pollution. The government offered to reduce the amount of carbon dioxide released per unit of gross domestic product by 25 percent by 2020 from 2005 levels to help combat climate change, the Ministry of Environment and Forests said Jan. 30. Finance Minister Pranab Mukherjee on Feb. 26 imposed a tax on coal sales to fund renewable energy projects.

Reliance, Oil & Natural Gas Corp. and Gujarat State Petroleum Corp. have discovered gas fields in India, some of which may start producing in 2012, according to the companies. ONGC, the nation’s biggest energy explorer, plans to spend a record $5 billion to develop gas fields to boost output by almost 60 percent in six years, two people with direct knowledge of the matter said July 26.

India’s gas output rose 28.4 percent in 2009, the world’s biggest increase, according to BP Plc’s 2010 Statistical Review of World Energy. China’s production climbed 6.1 percent in the same period.