City gas distributors to lose edge if prices keep increasing4 min read . Updated: 20 Nov 2014, 01:24 PM IST
Hike in the price of CNG coincided with a drop in prices of diesel and petrol, spelling bad news for the CGDs
Mumbai: For India’s city gas distributors (CGDs), 18 October held bad news.
On that day, the government increased the price of domestically produced natural gas by 33%. In consequence, city gas distributors, who supply piped natural gas (PNG) to homes and industries and compressed natural gas (CNG) to fuel stations, were forced to raise prices by 10%.
However, the hike in the price of CNG coincided with a drop in the prices of diesel and petrol, which compete with it.
Though the price hikes on 1 November helped the companies protect their profit margins, further rise in natural gas prices could take away the lure of PNG and CNG. The government has already suggested that the price of domestically produced natural gas will be revised every six months.
CGDs, which have always benefited from the high prices of diesel and petrol, could take a hit if crude oil prices dip further, as that will keep their price low.
The difference between running a car on CNG and diesel has considerably shrunk, while PNG has become even more expensive than subsidized LPG.
According to MGL, at current prices, a CNG car that does about 50km a day could save up to ₹ 21,000 a year, compared with a diesel car. The higher the run of the car, the higher the savings.
However, a check on the savings calculator on MGL’s website shows that the price advantage is now ₹ 10,000 less than what it was a month ago, when prices were low.
According to Gagan Dixit, senior analyst with brokerage Quant Capital, with the increase in the price of gas from $4.2 per million metric British thermal units (mmBtu) to $5.61 per mmBtu, the cost of running a CNG vehicle has gone up from ₹ 2.4/km to ₹ 2.6/km, while that for a diesel vehicle is steady at ₹ 4.4/km.
“The government has done the right balancing act by fixing the price of natural gas at $5.61 per mmBtu; this just balances the competitiveness of CGD companies. Any further rise in gas prices could mean the economics could go awry for them," he said.
MGL said that even after the price hike, CNG is 40% cheaper than diesel and about 60% cheaper than petrol, although the firm admitted the differential has shrunk.
“We anticipate gas prices to remain competitive as compared to alternative fuels in India. However, in case crude oil prices go down substantially, then the competitiveness may get slightly affected," an e-mailed response said.
The price of PNG in terms of energy equivalent of a cylinder has now gone from ₹ 503 to ₹ 560, while that of a subsidised domestic LPG cylinder has increased from ₹ 414 to approximately ₹ 450—a difference of ₹ 110.
A report by Dixit on 10 October had estimated that a natural gas price hike to $5.6/mmBtu would increase the PNG-LPG price gap from ₹ 90 to ₹ 110.
“Obviously, if you keep increasing the gas price in India, it will hurt the competitiveness of CGD companies. But one has to ensure a savings differential of around 15% between CNG and diesel and at least 20% between CNG and petrol to incentivize the customers to go for CNG," said B.S. Negi, former member of the Petroleum and Natural Gas Regulatory Board, the CGD regulator.
Indraprastha Gas Ltd (IGL), which retails natural gas in the national capital region, is yet to increase product prices.
Mumbai’s MGL hiked CNG prices by ₹ 4.50 per kg to ₹ 43.45 per kg. It also raised tariff for PNG supplied to households by ₹ 2.49 per standard cubic metre (scm) to ₹ 26.58 per scm.
IGL did not respond to queries as the company is in the mandatory silent period before its quarterly results expected on 12 November.
Adani Gas, however, said cheaper diesel won’t have much impact on its CNG business.
“You have to understand that CNG was never meant to compete with diesel. Diesel is an inter-city transport product while CNG is largely meant for intra-city. CNG was meant to compete with petrol and even with a hike in price of CNG, it will always be cheaper than petrol," said Rajeev Sharma, chief executive officer, Adani Gas, the city gas distribution arm of Adani Enterprises Ltd. It operates in the cities of Ahmedabad and Vadodara in Gujarat, Faridabad in Haryana and Khurja in Uttar Pradesh.
Sharma, who was the first managing director of IGL, also said CNG as a fuel is preferred by the middle class who opt for smaller cars. For them, even a difference of ₹ 10 is important.
“We have competed with petrol all these years even when we had to import expensive gas (regassified liquefied natural gas) and we have competed with subsidized LPG cylinders all these years. Sometimes, you get less margins, sometimes you get higher; but businesses still thrive," he added.
Deepak Mahurkar, director (oil and gas industry practice) at PricewaterhouseCoopers said: “Obviously, city gas distribution companies come under cost pressure when the domestic gas price is increased. But most CGD networks, including the licences under evaluation for new award, factor in the LNG in full or part. LNG price is much higher than domestic gas price. Albeit at relatively higher price, if the networks get assurance of higher quantum of domestic gas, going forward, it will only be good news."
Diesel cars are now available in the ₹ 4.5-10 lakh segment, Joshi pointed out.
“This, in turn, may hit CNG volumes further. The same has reflected in the last 8 quarters, with flattish volume growth in the CNG segment. Coupled with increasing price of gas and falling crude oil price, can keep margins of Indraprastha Gas Ltd and others under pressure," he said.