The Central government has announced a reduction in the supply of domestically produced natural gas to city gas retailers by up to 20%. This move could lead to an increase in the price of compressed natural gas (CNG) by Rs 4-6 per kilogram unless there is a cut in the excise duty.
Natural gas, sourced from domestic fields in the Arabian Sea and Bay of Bengal, is essential for producing CNG, which powers vehicles, and piped natural gas (PNG) for cooking in households. The decline in gas production from these fields, which has dropped by 5% annually, has intensified the situation. Consequently, city gas distributors are now forced to rely more on imported liquefied natural gas (LNG), which is more expensive, leading to potential price hikes.
Currently, the government has assured that the supply for household cooking gas remains stable. However, the supply for CNG production, mainly serving the transportation sector, has been significantly reduced. In May 2023, about 90% of CNG demand was satisfied through domestic gas supplies, but by October 16, that number had plummeted to just 50.75%, down from 67.74% the previous month.
This drop in domestic supply compels city gas retailers to seek out pricier imported LNG, which costs between $11-12 per million British thermal units (mmBtu), compared to $6.50/mmBtu for local gas. As a result, CNG prices are projected to rise by Rs 4-6 per kilogram, depending on the region.
Despite the anticipated price increase, gas retailers have not yet raised CNG rates. They are currently in talks with the Ministry of Petroleum and Natural Gas to find a resolution. One option being considered is a reduction in the excise duty on CNG, which currently stands at 14%, equating to Rs 14-15 per kg. Lowering this duty could help alleviate the financial burden on retailers and consumers, especially with elections approaching.
The potential rise in CNG prices may become a politically sensitive issue, particularly with upcoming state elections in Maharashtra and Delhi—both significant markets for CNG.
The reduction in domestic gas allocation follows a decision to restore supplies to the ONGC-promoted petrochemical plant, OPaL, located in Dahej, Gujarat. This facility, which previously had a gas allocation of 4.12 million standard cubic meters per day, saw its supply halved during the COVID-19 pandemic. As part of a government-approved revival package, ONGC will invest Rs 10,501 crore in equity, allowing the plant to receive increased domestic gas supplies.
This reallocation of resources has negatively impacted city gas retailers, resulting in lower domestic gas supplies for them.
Industry experts have expressed concern over the rising costs facing city gas distributors. Girish Kadam, Senior Vice President at Icra Ltd, remarked that the reduction in domestic gas allocation will force distributors to turn to pricier alternatives, such as high-pressure high-temperature (HPHT) gas and LNG, thus increasing costs for the entire sector.
City gas distribution companies, including Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL), are already feeling the financial strain from these cuts. IGL reported a 21% reduction in its domestic gas allocation, while MGL is actively seeking alternative gas sourcing to alleviate financial pressures. Adani Total Gas Ltd has also experienced a 16% cut in its domestic gas allocation as of mid-October.
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