Indians could be facing a CNG price hike of Rs 5 per kg or more, as reduced allocation of domestic Administered Price Mechanism or APM gas for city gas distributors is expected to increase CNG firms' costs.
The government has reduced the allocation of domestic APM gas by 17-20%. This move has been confirmed by Indian gas companies and is primarily affecting the CNG segment.
This cut amounts to about 4 million metric standard cubic meters of gas per day, according to Citi, and could raise operational costs for companies like Indraprastha Gas Ltd., Mahanagar Gas Ltd., and Gujarat Gas Ltd.
What Is APM Gas?
Administered Price Mechanism gas is a natural gas sourced from specific fields in India, like those operated by Oil and Natural Gas Corp., and is priced lower than international rates due to government regulation. Currently, APM gas is priced at $6.50 per million metric British thermal unit.
This lower pricing helps city gas distribution companies maintain operational costs, preserving their margins and allowing for lower CNG retail prices for consumers. However, the recent 20% cut in APM gas allocation is a significant blow to these companies and raises concerns about the government's commitment to the sector, especially as allocations have been declining for several quarters.
Potential CNG Price Hike
While Citi does anticipates gas companies to oppose this decision, the absence of any reversal or relief from the government would increase costs for CNG companies.
This could translate into increased CNG prices by Rs 5 per kg or more to maintain margins, equating to a 7% price hike for companies like Indraprastha Gas and Mahanagar Gas.
As per CarDekho, the average CNG price in Mumbai stood at Rs 75 per kg on Oct. 16. A Rs 5 hike could increase it to Rs 80.
Also Read: Oil & Gas Q2 Results Preview: Mixed Quarter For OMCs, Gas Distributors To See Volume Growth
Negative Impact On Gas Companies
Citi estimates that lower APM allocations could lead to a Rs 4 per standard cubic meter increase in gas costs. With the current APM price at $6.50 per million metric British thermal unit, companies may need to source lost volumes from international markets. While many have secured long-term LNG contracts, a significant portion may still be tied to the spot market, where prices are currently at $13-14 per million metric British thermal unit.
This reliance on higher-priced gas puts pressure on margins and could prompt a CNG price hike, potentially affecting sentiment around volume growth in the CNG segment. Indraprastha Gas and Mahanagar Gas may be particularly vulnerable due to their heavy reliance on CNG.
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