The recent reduction in prices of domestic gas is likely to improve profitability of the country’s city gas distribution companies, analysts believe.
“If prices (of CNG/PNG) are not revised then profitability will only improve because lately it has been impacted owing to reducing proportion of the APM (Administered Pricing Mechanism) gas,” said Prashant Vasisht, Senior Vice President and Co-Group Head, Icra.
The government reduced the prices of APM gas for the first time in two years following a decline in the benchmark rates after it introduced a new gas pricing formula for such gas in 2023.
As per the official notification, the price of natural gas from legacy fields allocated to state-owned Oil and Natural Gas Corp has been reduced to $6.41 per million British thermal units (mmBtu) from $6.75 earlier.
In April 2023, the Union Cabinet accepted an expert committee report to price gas from legacy fields on a monthly basis, also called APM gas, at 10% of monthly average import price of crude oil with a floor of $4 per mmBtu and a cap of $6.5 per mmBtu. New Well Gas, on the other hand, is the gas produced from the new wells drilled by ONGC and Oil India in the same nomination fields and is priced at 12% of the Indian crude oil basket, making it costlier.
However, with deallocation of APM gas to CGDs – which is already declining in the country, analysts see a potential rise in input cost with new well gas (priced higher) which could lead CGDs to face some margin pressure.
“The flow of APM gas or the cheaper gas has been reduced and the new gas that comes out is priced at a higher rate. Now if the share of APM gas reduces, there might be an increase in their input cost as they would have to source newer gas (which is more expensive),” said Manas Majumdar, Partner at PwC India. “How much of that increased cost could they pass on is a question,” he noted.
The reducing share of domestic gas and a deallocation of such gas to the CGDs forcing them to replace it with the New Well Gas has increased input costs for these entities. Since APM gas comes from fields that are maturing, the production of such gas is declining.
“One challenge is the sourcing portfolio that will increase the prices of their input gas if the share of new well gas increases. On the output side they are competing with alternate fuels like petrol, diesel, and LPG – prices of which have not been reduced, making it difficult for CGDs to increase CNG/PNG prices,” Majumdar said.
If the allocation of domestic gas remains stable, the CGDs may see some comfort in their profitability margins.
In April, the Ministry of Petroleum and Natural Gas announced key changes in the domestic gas allocation policy in order to ensure sustained availability and affordability of natural gas for the Compressed Natural Gas (CNG) used in transport and Piped Natural Gas (PNG) used in domestic households for cooking.
As per the new policy guidelines, domestic natural gas allocations for CNG and PNG segments will be done on a two-quarter advance basis starting Q1FY26 and allocation will also now include New Well Gas from nomination fields of state-owned ONGC and OIL.
As both APM gas and New Well Gas prices are linked to Indian Crude Basket prices, calculated monthly, with the recent decline in crude prices, the government believes that this allocation of domestic gas would make natural gas more affordable for CNG and PNG consumers.
Brent crude oil prices have declined and are hovering at a range of $60-65 per barrel on the back of slowing global demand and increase in output by the Organisation of Petroleum Exporting Countries. Icra expects crude oil prices to average between $60-70 per barrel in FY26.
