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Home / Industry / Energy /  Gas price hike to help producers, hurt CGDs

Gas price hike to help producers, hurt CGDs

Under pricing guidelines issued in 2014, the government last week raised domestic natural gas price by 41% to $8.57/mmbtu for the second half of FY23. bloomberg

  • Shares of gas producers ONGC and Oil India rose 3-4.5% on Monday

NEW DELHI :The sharp increase in domestic gas price has brought some relief to oil and gas producers that faced the heat of windfall taxes, while city gas distributors which will have to pay higher prices are expected to face margin pressure.

NEW DELHI :The sharp increase in domestic gas price has brought some relief to oil and gas producers that faced the heat of windfall taxes, while city gas distributors which will have to pay higher prices are expected to face margin pressure.

City gas utility Mahanagar Gas Ltd increased the retail price of compressed natural gas (CNG) and piped natural gas (PNG) by 6 a kg and by 4 per standard cubic meter, respectively, in and around the megapolis from Monday midnight.

City gas utility Mahanagar Gas Ltd increased the retail price of compressed natural gas (CNG) and piped natural gas (PNG) by 6 a kg and by 4 per standard cubic meter, respectively, in and around the megapolis from Monday midnight.

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Shares of gas producers such as ONGC and Oil India Ltd gained 3-4.5% on Monday when the broader indices were down by more than a percent.

Under the pricing guidelines issued in 2014, the government has raised domestic natural gas price (under administered price mechanism or APM) by 41% to $8.57 per mmbtu (million British thermal units) for the second half of FY23, applicable from 1 October, against $ 6.1/mmbtu in the first half. With rising international gas prices, domestic prices are expected to be revised upwards. For gas produced from deep water, ultra-deepwater, and high-pressure high-temperature fields, the price ceiling has seen an increase from $9.92/mmbtu in H1FY23 to $12.46/mmbtu for H2FY23.

Yogesh Patil, an analyst at Centrum Broking Ltd, said every $1/mmBtu rise in APM gas price leads to an increase in Ebitda of 4,600 crore or 4% for ONGC and 570 crore or 7% for Oil India. Both companies may remain key beneficiaries. The benefits of high ceiling prices may accrue for Reliance Industries (RIL), too. However, oil and gas exploration business is a rather small portion of RIL’s business, since it derives the majority of its revenues from refining, petrochemical, retail, telecom, digital services and other businesses.

Patil said based on Centrum’s calculations, considering rising gas production from KG basin, RIL’s FY23 consolidated Ebitda will improve by 1.3%. Tough fields like the KG D-6 block operated by RIL-BP may get higher $12.46/mmbtu price and every $1/mmBtu rise in deep water gas price leads to 500 crore in improvement in RIL’s H2FY23 Ebitda.

Meanwhile, gas distribution companies will see the cost of gas procured for distribution rise. City gas distribution companies such as Mahanagar Gas, Indraprastha Gas Ltd and Gujarat Gas were down 2-4% on Monday. However, CGDs enjoy strong pricing power, and will try to pass on the costs via price hikes, said analysts. Still, pressure on margins is still not ruled out.

Also, the discount of CNG prices over petrol and diesel will decline, and may put pressure on volume growth. Notably, with declining crude prices, petrol and diesel prices may see downward revision.

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Jefferies India Pvt. Ltd analysts said IGL needs to raise CNG prices by 8/kg and MGL needs to raise price by 9/kg to pass on the impact of the rise in feedstock cost. This would reduce CNG’s discount to gasoline/diesel from 45%/30% to 40%/20% for IGL and from 45%/30% currently to 40%/20% for MGL. This could impact volume growth as per the brokerage, which feels that for Gujarat Gas, given that the priority sector constitutes only 25% of overall volumes, the impact would be relatively small.

Meanwhile, pressure on higher input costs is a larger concern. With spot gas prices, the government had increased allocation of APM gas to CGDs in August. Now, with APM gas prices going up, the positives from the higher allocation are likely to dilute.

The rise in APM gas cost roughly offsets the benefit of higher allocation (94% from 85% earlier) announced in August for CGDs, said Jefferies.

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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