Domestic Gas Allocation Cut To Impact City Gas Capex

The Indian government's decision to cut the allocation of cheaper administered price mechanism (APM) gas to city gas distributors may have a negative impact on their capital expansion plans in the near future.

For companies like Indraprastha Gas Ltd., Mahanagar Gas Ltd., and Gujarat Gas Ltd., which have an operating margin of Rs 6.50 per standard cubic meter to Rs 11/SCM, they may lose most of the advantages secured from the APM gas if they get burdened with high-cost imported LNG.

According to people close to the development who spoke on conditions of anonymity, the government wants the high-profit-margin CGD companies to prepare for market-driven prices.

Companies like IGL, MGL, and Gujarat Gas have high margins and can absorb partial price hikes.

However, this may lead to an increase in CNG prices of up to Rs 6-8 per kg.

The government has sought a cost breakup from CGD companies to determine the impact of the reduced allocation.

Another reason for the reduced APM gas allocation is stated to be ONGC's allocation of 3.20 mmscmd gas by Oil and Natural Gas Corporation to ONGC Petro Additions Ltd. at a 20% price premium. This allocation is from its new wells and interventions to help OPAL meet its feedstock requirements.

"Although companies can pass on the higher cost to consumers, the attractiveness of CNG over other fuels like diesel and petrol that has been declining for the last few years will further reduce," said Sumit Pokharna, vice president and senior oil analyst with Kotak Securities.

In Mumbai, the price differential between CNG compared with diesel & petrol as of Monday is Rs 15/litre and Rs 28/litre, respectively. (CNG is Rs 75/kg, Diesel Rs 89.97/litre, and Petrol Rs 103.44/litre.)

This differential will come down by Rs 6-8/litre if the CGD companies go ahead with a full price hike for consumers.

The erosion in margins on account of dependence on imported liquefied natural gas that costs around $13.8/mmBtu will impact the future capital expansion plans of the CGDs.

"Some of the newer CGDs may have to re-evaluate their expansion plans given the highly capital-intensive nature of the business, though it is likely that there will not be an immediate reduction in demand for CNG, given the price differential that will still exist even if the CGD companies pass on the entire impact of the price increase to the customer," said Ashwin Jacob, Partner and Leader, Energy, Resources, and Industrials at Deloitte India.

The government has allocated 307 geographical areas to city gas distribution companies; out of that, around 200 GAs are in various phases of expansion that could be the likely victims.