MUMBAI: The gas procurement cost of city gas distribution companies (CGDs) is set to rise by Rs 2-3 per kg following the recent reduction in the allocation under the administered price mechanism (APM) by the government.
This on the other hand will also get passed on to end consumers later.
These companies get priority gas allocation at lower prices under APM from the legacy gas fields for the domestic compressed natural gas (CNG) and piped natural gas (PNG) - domestic segments.
However, last week, the state-owned Gail India, which is the nodal agency for domestic gas allocation, reduced the APM gas allocation for the CNG segment by 20 per cent of their CNG requirement, effective October 16.
APM allocation for CGD players will now be reduced to 50 per cent of their CNG requirement, from the allocation level of 70 per cent this fiscal year so far.
Thus, to maintain adequate supply, CGD players will need to procure gas from costlier sources such as domestic high-pressure, high-temperature gas fields or imported liquefied natural gas.
According to Ankit Hakhu, a director with Crisil Ratings, as against the current APM gas prices of USD 6.5 per metric million British thermal units (mmBtu), high-pressure, high-temperature gas prices are trending at USD 9.5 per mmBtu and LNG prices are USD 11-12 per mmBtu.
This means the input cost for the CNG segment is likely to increase by Rs 3.5-4.5/kg. However, given that the share of CNG in the overall CGD segment is around 60 per cent, the overall cost of gas procurement may rise by Rs 2-3/kg for the industry.
To maintain a profit margin, CNG's selling price may also rise as players are likely to pass through the increased cost pressure to consumers, although in a gradual manner, in the coming months. Some players have already undertaken partial increases in CNG prices.
This trend has been demonstrated in past years as well, including fiscal 2023, when gas prices had shot up after the Russia-Ukraine conflict began. But these hikes were partial and have also witnessed some lag effect.
According to Ankush Tyagi, an associate director with the agency despite the expected increase in prices, the competitiveness of CNG over petrol and diesel will remain healthy at 25 per cent, down from 30 per cent earlier.
This should limit any material impact of the price hike on sales over the medium term. Further, the likely pass-through of cost increase will support operating profitability and in turn the credit profiles of CGD players.
Legacy fields include oil and gas fields that were given on a nomination basis to ONGC and Oil India before 1999. The share of CNG in total CGD volume is 55-60 per cent, and that of domestic PNG is 8-10 per cent, and the rest is from industrial & commercial PNG.