CNG Prices Likely To Rise by Rs 4-6 Amid Supply Cuts: Report

Natural gas extracted from various sites across India, including the Arabian Sea and the Bay of Bengal, is the primary raw material for producing CNG and piped cooking gas for households

To sustain contribution margins at current levels, CNG prices will need to rise by approximately Rs 5 to Rs 5.5 per kg

Source : Pexels

The government has cut supplies of cheaper domestically produced natural gas to city retailers by as much as 20 per cent, potentially leading to a price increase of Rs 4-6 per kg for CNG used in vehicles unless excise duties on the fuel are reduced, according to a PTI report citing sources.

Natural gas extracted from various sites across India, including the Arabian Sea and the Bay of Bengal, is the primary raw material for producing CNG and piped cooking gas for households. However, production from ageing fields, which supply city gas retailers and are subject to government price regulation, has declined by up to 5 per cent annually due to natural depletion. Consequently, the supply of gas for CNG has been reduced, dropping from 67.74 per cent of demand last month to just 50.75 per cent as of October 16, according to four informed sources.

To compensate for this shortfall, city gas retailers are now purchasing more expensive liquefied natural gas (LNG), likely leading to the anticipated CNG price hike. While gas from legacy fields is priced at USD 6.50 per million British thermal units (mmBtu), imported LNG costs between USD 11-12 per mmBtu.

Retailers have kept CNG prices the same, as they are in discussions with the Ministry of Petroleum and Natural Gas to seek solutions. One potential option is for the government to reduce the excise duty on CNG, currently set at 14 per cent, to Rs 14-15 per kg. A duty cut could help retailers avoid passing on the increased costs to consumers.

The potential price increase for CNG is also politically sensitive, particularly with elections approaching in Maharashtra next month and in Delhi soon after, as both cities represent significant CNG markets in the country.

The decision to cut gas supplies to city retailers was made to restore fuel to the ONGC-promoted OPaL petrochemical plant in Dahej, Gujarat. This facility was initially allocated 4.12 million standard cubic meters per day of domestically produced natural gas, but its allocation was reduced to 1.95 mmscmd and was halved during the COVID-19 pandemic. The lack of reliable domestic gas has contributed to OPaL's financial losses. 

To address this issue, the government has approved a revival package that includes an equity infusion of Rs 10,501 crore from ONGC and an allocation of 3.44 mmscmd of domestic gas, primarily from new ONGC wells, resulting in decreased availability for city gas retailers.

Girish Kadam, Senior Vice President & Group Head of Corporate Ratings at Icra Ltd, said, "The APM gas allocation has been reduced for the CGD sector by 20 per cent of the current domestic gas consumption by the sector. The reduction in APM allocation will have to be replaced by more expensive HPHT gas or (imported) LNG, which will push the overall gas costs for the sector." 

To sustain contribution margins at current levels, CNG prices will need to rise by approximately Rs 5 to Rs 5.5 per kg.

Indraprastha Gas Ltd, which supplies CNG in the national capital, and Mumbai-based Mahanagar Gas Ltd have reported in regulatory filings that supplies of domestically produced gas—previously available at a capped rate significantly lower than the price of imported gas—have been reduced.

"The company gets domestic gas allocation for meeting the requirement of CNG sales volumes at the pricing fixed by the government (presently at USD 6.5 per million British thermal units). Based on communication received by the company from GAIL (India) Ltd (the nodal agency for domestic gas allocation), this is to inform that there has been a major reduction in domestic gas allocation to the company effective from October 16, 2024," IGL said in a filing.

The new domestic gas allocation for IGL is approximately 21 per cent lower than the previous amount, which the company indicated will negatively affect its profitability. IGL stated that it is actively engaging with key stakeholders to mitigate this impact.

In a separate statement, MGL noted that according to the Policy Guidelines issued by the Ministry of Petroleum and Natural Gas on August 10, 2022, domestically produced Administrative Price Mechanism (APM) natural gas is to be allocated to city gas distribution (CGD) companies for priority segments, specifically domestic piped natural gas and CNG for transportation. The policy stipulates that the supply of domestic gas to CGD entities will be limited to the quantity available and allocated to GAIL (India) Limited for these segments.

"...the company is exploring options of sourcing gas through domestically produced high pressure high temperature (HPHT) gas, new well/well intervention gas (NWG) from ONGC and benchmark-linked long-term gas contracts, so as to continue to provide gas to its customers with price stability," MGL added.

Adani Total Gas Ltd, another major city gas retailer, stated in its filing that its allocation of APM-priced domestic gas has been reduced by approximately 16 per cent, effective October 16, 2024, compared to the previous allocation.

"While the company shall take all steps needed to optimise the profitability, it may, however, be noted that pending the resolution, there would be an adverse impact on the profitability of the company," it said.