Impact of APM Gas Allocation Cut on City Gas Prices

City gas distribution (CGD) companies across India are bracing for a potential price hike as the government reduces APM gas allocation by 20%. This reduction could lead to a significant increase in CNG prices, by as much as ₹6/kg, according to industry sources. With a lower supply of cheaper domestic gas, companies will likely turn to more expensive spot liquefied natural gas (LNG) to meet their needs.

Why Are Prices Expected to Rise?

The price hike is directly linked to the reduction in administered pricing mechanism (APM) gas allocation. APM gas, which is supplied at a much lower price than imported LNG, has seen a cut in allocation to city gas distribution companies. Here are the key reasons driving the price increase:

APM Gas Cut by 20%: The government has slashed the APM gas allocation by 20%, reducing the availability of cheaper gas to CGD companies. This gas is typically priced at $6.50/mmBtu, which is much lower than the prices of imported LNG.

Sourcing Spot LNG: To make up for the shortage, CGD companies are expected to source around 20% of their gas requirements from spot LNG markets. Spot LNG prices are currently hovering between $11-12/mmBtu, significantly higher than APM gas.

Rising Procurement Costs: With the higher cost of spot LNG, companies are faced with the challenge of whether to pass on the full impact of increased procurement costs to consumers. This decision will largely depend on the pricing dynamics in the gas industry and regulatory approvals.

Price Projections and Market Impact

As per industry estimates, CGD companies may hike CNG prices by ₹6/kg to cover the higher cost of sourcing gas. This would be a notable increase for consumers, who are already grappling with rising fuel costs. The cut in APM gas allocation mix, now projected at approximately 49-50% (down from 69-70%), will exacerbate the pressure on companies to look for more expensive alternatives.

The price rise is also attributed to natural production decline in APM gas fields. As production decreases, the allocation of gas to key sectors, such as city gas, is scaled down, pushing companies toward more expensive imported gas options.

Industry Response and Challenges

City gas distribution companies are currently assessing the impact of the reduced APM gas allocation on their operations and profitability. Some of the key challenges they face include:

Balancing Costs and Consumer Affordability: CGD companies are weighing the decision of passing on the entire cost increase to consumers or absorbing some of the costs to maintain affordability.

APM Gas Allocation for Other Sectors: The allocation of APM gas has also seen a higher share diverted to other industries, such as ONGC Petro Additions Limited (OPaL). This could further strain the availability of cheaper gas for city gas distribution.

Fluctuating Spot LNG Prices: The volatility in spot LNG prices adds another layer of uncertainty for CGD companies, as they have to factor in global price movements when deciding on future price hikes.

Future Outlook

While the immediate concern is the expected price hike in the near term, the longer-term outlook remains uncertain, depending on several factors:

LNG Price Trends: If spot LNG prices continue to remain high, it could lead to further cost pressures for CGD companies and potentially higher CNG prices for consumers.

Government Interventions: There is a possibility that the government could intervene to stabilize gas prices or adjust the allocation of APM gas to reduce the reliance on expensive LNG imports.

Consumer Impact: Any significant increase in CNG prices will affect a large base of consumers, particularly in metropolitan areas where city gas networks are expanding rapidly.

Conclusion

The anticipated hike in CNG prices by ₹6/kg reflects the challenges faced by city gas distribution companies as they deal with the 20% reduction in APM gas allocation. With the reliance on costlier spot LNG to fill the gap, the sector is grappling with higher procurement costs, which are likely to be passed on to consumers. As the market continues to evolve, CGD companies will need to navigate the balance between affordability and profitability in the coming months.

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