City gas distribution (CGD) companies are likely to increase retail prices of compressed natural gas (CNG) in the coming weeks as the government cut allocation of cheaper Administered Pricing Mechanism (APM) gas for the second time in a month. India’s gas regulator, however, has cautioned that the CGD players are required to keep gas prices competitive with other fuels in order to maintain growth in the CNG sector.
With input costs rising, CGD companies may have to take a call on raising the price of CNG, the preferred alternative auto fuel, but it should not be prohibitive, Gajendra Singh, member, Petroleum and Natural Gas Regulatory Board (PNGRB), told Moneycontrol.
“If the (CNG) price is more than that of petrol or diesel, their (CGDs') business will not grow. Secondly, the customers will be looted that way,” said Singh.
On November 16, the government reduced allocation of APM gas to CGD players including Indraprastha Gas Limited (IGL) and Mahanagar Gas Limited (MGL) by 20 percent on top of the month-ago announced cut of 20 percent.
APM gas is sold at a cheaper rate to CGD players to ensure growth in gas consumption for essential services such as domestic piped natural gas (PNG) and CNG used in transport. According to government data, APM gas is sold at $6.50 per mmBtu (million metric British thermal units) while HPHT or high pressure high temperature gas costs $10.16 per mmBtu.
CNG price hike
The reduction in APM allocation would have to be compensated for by more expensive HPHT gas—produced from difficult areas such as offshore fields—or gas purchased in the spot market, which could force CGD players to hike CNG prices. Experts believe the increase would need to be around Rs 8 per kg to maintain margins at current levels.
“Two consecutive reductions in APM gas allocation for the CNG sector have resulted in pressure on CNG sales margins. In the near term, the demand will have to be met through spot LNG (liquefied natural gas) which is currently available at around $13-14/mmBtu, and in the medium term through term LNG or HPHT gas. With the current reduction, the APM gas availability for the CNG segment has fallen to about 40-45 percent of the demand vis-a-vis about 70 percent prior to the reduction in October 2024,” said Girishkumar Kadam, senior vice president and group head, corporate ratings, ICRA Limited.
“To maintain the contribution margins at earlier levels, CGD entities would have to increase the retail prices of CNG by about Rs 8.50-9.0 per kg. ICRA believes the sharp rise in the cost of procurement would lead CGD players to take graded price increases. The expected price rise may result in slower growth in CNG vehicle registrations, which have been the key driver of CNG sales volume for the sector,” added Kadam.
The government has decided to cut APM gas supplies to CGD companies on account of declining production from India’s old oilfields..
Citing lower allocation of APM gas, IGL last revised prices in July increasing the CNG retail rate by Re 1 per kg. Meanwhile, MGL hiked CNG prices by Rs 1.50 per kg and PNG prices by Re 1 per standard cubic metre.
Left with expensive gas options
Amid stagnant domestic gas production and growing demand, CGD companies would have to look towards expensive sourcing options including spot LNG beyond the short to medium term.
“In the longer run, APM gas would not be available for life. APM gas would be fully over in maybe a year or two. So the CGD entities need to work out their business plan in such a way that they can attract industrial customers, and how they can source cheaper gas so that their input costs remain low,” said Singh.
After the government order on the APM gas allocation cut, MGL said in a filing that the company is exploring options of sourcing gas through domestically produced new wells from Oil and Natural Gas Corporation and benchmark-linked long-term gas contracts so as to continue to provide gas to its customers with price stability.
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