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NEW DELHI : The recommendations of the government-appointed panel for reviewing the prices of natural gas, if approved by the cabinet can be beneficial for city gas distribution (CGD) companies, analysts said.

The Kirit Parikh committee’s recommendations include setting a floor price of $4 per mmbtu (million British thermal units) and ceiling price of $6.5 per mmbtu for gas produced from old fields like those of ONGC Ltd and Oil India Ltd, with the option to increase the ceiling price by $0.5 per mmbtu every year before it’s opened up to the market from 1 January 2027.

“Capping administered price mechanism (APM) gas prices is encouraging for CGDs, as they account for 90% of priority sector demand (compressed natural gas + piped natural gas domestic)," said Avishek Dutta, research analyst at Prabhudas Lilladher. Falling domestic gas and spot LNG (liquified natural gas) prices are a positive for Indraprastha Gas Ltd and Mahanagar Gas Ltd, followed by Gujarat Gas, added Dutta.

IGL and MGL are dependent on a significant portion of allocation of APM gas to meet their gas distribution requirements. Hence, lower domestic gas prices will accrue more benefits to the two. Gujarat Gas on the other hand depends more on imported LNG and hence a decline in spot LNG prices is a positive.

The domestic natural gas APM price had seen a steep 40% rise to $8.57/mmbtu (gross calorific value basis) for second half FY23 (from $ 6.1/mmbtu in the first half FY23). The rise in domestic gas prices with increasing international gas prices had meant that CGDs had to continue hiking prices for CNG. The gas companies had been taking price hikes post October ‘22 APM price hike. The price difference between CNG and other auto fuels thus continued to fall and has been adding to concerns on volume growth.

The lower prices of gas can mean lower CNG prices. APM gas price would come down to $6.5/mmbtu from current $8.6/mmbtu and thus CNG price could come down by up to 8.5/kg, said an analyst at a domestic brokerage. The benefits would be more if gas prices decline below $6.5/mmbtu and also if companies pass on the APM lower gas prices, added the analyst.

Gas produced from new fields is to be given pricing and marketing freedom, which is a positive for Reliance Industries and ONGC, said analysts at Prabhudas Lilladher.

Free pricing of domestic gas from difficult fields would attract sizable investment from upstream companies which could lead to higher domestic gas production in the long run, said CareEdge Ratings.

However, CareEdge Ratings believes that domestic gas producers of legacy fields could have lower realisation of natural gas to the extent of 23,000 crore in FY24.

CareEdge Ratings believes recommendations of the Kirit Parikh committee are a great balancing act to safeguard the interest of gas consumers, city gas distribution companies and gas producers from difficult fields. It will boost the use of natural gas and help the government contain high inflation.

 

ABOUT THE AUTHOR

Ujjval Jauhari

Ujjval Jauhari is a deputy editor at Mint, with over a decade of experience in newspapers and digital news platforms. He is skilled in storytelling, reporting, analysing and writing about stocks, investment ideas, markets, corporates and more. He is based in New Delhi.
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