City gas distribution companies (CGDs) in Mumbai are facing an increase in gas procurement costs by Rs 2-3 per kilogram. This change comes after the government reduced the allocation of gas under the administered price mechanism (APM).
Consumers can expect this increase to be reflected in their bills soon.
CGDs receive priority gas allocations at lower prices from legacy gas fields under APM. This gas is primarily used for domestic compressed natural gas (CNG) and piped natural gas (PNG) services.
However, last week, Gail India, the state-owned agency responsible for domestic gas allocation, announced a 20% cut in APM gas allocation for the CNG segment. This reduction, effective October 16, lowers the APM allocation for CGDs to 50% of their CNG needs, down from 70% this fiscal year.
To ensure adequate supply, CGDs will now have to source gas from more expensive options, such as high-pressure, high-temperature gas fields or imported liquefied natural gas (LNG).
Ankit Hakhu, a director at Crisil Ratings, noted that APM gas prices currently stand at USD 6.5 per metric million British thermal units (mmBtu). In contrast, prices for high-pressure, high-temperature gas are around USD 9.5 per mmBtu, while LNG costs range from USD 11 to USD 12 per mmBtu.
As a result, the input cost for the CNG segment is expected to rise by Rs 3.5-4.5 per kg. Since CNG accounts for about 60% of the overall CGD segment, the average procurement cost for the industry may increase by Rs 2-3 per kg.
To protect profit margins, CGDs are likely to gradually raise CNG prices to offset these increased costs. Some companies have already implemented partial price hikes.
This pattern of price adjustments has been seen in previous years, particularly in fiscal 2023, when gas prices surged following the onset of the Russia-Ukraine conflict. Those hikes were also partial and exhibited a lag effect.
Ankush Tyagi, an associate director at Crisil, stated that despite the anticipated price increase, CNG will still be competitive compared to petrol and diesel, with the price advantage decreasing from 30% to 25%. This should mitigate any significant impact on sales in the medium term. Additionally, passing on the cost increase will likely support the operating profitability of CGDs and improve their credit profiles.
Legacy gas fields refer to oil and gas reserves allocated to ONGC and Oil India on a nomination basis before 1999. CNG constitutes 55-60% of the total CGD volume, while domestic PNG makes up 8-10%, with the remainder coming from industrial and commercial PNG sources.
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