Lower APM gas allocation to increase city gas cost by Rs 2-3/kg: Crisil, ET EnergyWorld

The cost of gas procurement from city gas distribution (CGD) companies is expected to increase by 2-3 rupees per kilogram (kg) following a reduction in the allocation of incoming natural gas under the administered price mechanism (APM), the rating agency Crisil on Wednesday. Urban gas operators obtain priority allocation of gas at reduced prices under the APM from legacy gas fields for the domestic compressed natural gas (CNG) and piped natural gas (PNG) segments.

According to recent public announcements by these companies, GAIL (India) Ltd, the nodal agency for domestic gas allocation in the country, has reduced APM gas allocation for the CNG segment by 20 percent of its CNG requirements, from October 16, 2024. .

“It should be noted that the APM allocation for CGD stakeholders will now be reduced to around 50 percent of their CNG needs, compared to the allocation level of around 70 percent in this fiscal year so far,” Crisil said in a note .

Therefore, to maintain adequate supply, CGD stakeholders will have to purchase gas from more expensive sources, such as national high-pressure, high-temperature (HPHT) gas fields or imported liquefied natural gas (LNG).

Says Ankit Hakhu, Director, CRISIL Ratings, “Against current APM gas prices of US$ 6.5 per million British thermal units (MMBtu), HPHT gas prices are US$ 9.5 per MMBtu and prices of LNG are $11-12 per MMBtu. This means the cost of input gas for the CNG segment of CGD players is likely to increase by 3.5-4.5 rupees per kg However, given the share. of CNG in the overall CGD segment is around 60 percent, the overall cost of gas procurement may increase by Rs 2-3 per kg for industry players.”

To maintain profit margins, the selling price of CNG may also increase, as players must pass on the increased cost pressure to consumers, albeit gradually, in the coming months. Some players have already made partial increases in CNG prices.

This trend has also been demonstrated in recent years, including fiscal 2023, when gas prices soared amid a geopolitical crisis in the wake of the Russia-Ukraine conflict. However, these increases were partial and also witnessed some lag effect.

Says Ankush Tyagi, Associate Director, CRISIL Ratings, “Despite the expected rise in prices, the competitiveness of CNG3 as a transportation fuel against alternatives like petrol or diesel will remain healthy at 25 percent as against 30 percent before the price hike. This should limit any material impact of rising prices on CNG sales volume growth in the medium term. Furthermore, the likely repercussions of rising costs will support operational profitability and, in turn, the credit profiles of CGD players.

Legacy fields include oil and gas fields that were ceded by appointment to Oil and Natural Gas Corporation (ONGC) and Oil India Ltd before 1999.

Furthermore, the share of CNG in CGD’s total volume is 55-60 percent, that of piped cooking gas is 8-10 percent, while the rest comes from the supply of piped gas for industries and commercial use.