CGDs key beneficiaries if new gas price recommendations are approved

  • Falling domestic gas and spot LNG (liquified natural gas) prices are positive for Indraprastha Gas, Mahanagar Gas, Gujarat Gas

Ujjval Jauhari
First Published1 Dec 2022
IGL and MGL are dependent on significant portion of allocation of APM gas to meet their gas distribution requirements.. Photo: Bloomberg
IGL and MGL are dependent on significant portion of allocation of APM gas to meet their gas distribution requirements.. Photo: Bloomberg

The recommendations of a government-appointed panel for reviewing prices of natural gas, headed by Kirit Parikh, if approved by the Cabinet, could accrue gains for city gas distribution (CGD) companies, according to analysts.

The recommendations include setting floor price of $4 per mmBtu (million British thermal units) and a ceiling price of $6.5 for gas produced from old fields as that of ONGC Ltd and Oil India Ltd, with an option to increase ceiling price by $0.5 per mmbtu every year before it gets market-driven from 1 January 2027.

“Capping 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 Analysts at Prabhudas Lilladher. Falling domestic gas and spot LNG (liquified natural gas) prices are 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 for its gas supplies depends more on imported LNG (liquified Natural Gas) and hence decline in spot LNG prices is positive.

The domestic natural gas (APM) price had seen a steep 40% rise to $8.57 per mmBtu (gross calorific value basis) for second half FY23 (from $ 6.1 in the first half of FY23). The rise in domestic gas prices with rising international gas prices had meant that CGDs had to continue hiking prices for CNG. Gas companies had been taking price hikes post October 2022 APM price rise. The price differential between gas prices and other auto fuels such as petrol and diesel thereby continued to fall, 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 Rs8.5/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.

Besides, to promote new investment, gas produced from new fields is to be given pricing and marketing freedom, which is 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 said 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 said the 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 shall boost the use of natural gas and shall help the Government to contain high inflation

The committee has not made any immediate recommendations for HPHT (high pressure high temperature) gas but analysts expect it to be market driven from 1 Jan 2026.

With a dip in APM gas prices, GAIL’s feedstock cost for LPG business could also decline while lower gas prices bode well for the rise in gas transmission volumes.

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