8 April 2023 9:30 AM GMT

Oil & Gas

New Gas Pricing Formula: CNG, piped gas prices to be cut


New Gas Pricing Formula: CNG, piped gas prices to be cut


  • No clarity on deregulation
  • City gas distributors could reduce prices of CNG
  • CNG and PNG prices 80 per cent jump since August 2021

New Delhi: CNG and piped cooking gas prices will be cut by 9-11 per cent after the government revised the formula for pricing of natural gas, but there is no clarity on deregulation of the fuel, analysts said.

While the Union Cabinet accepted an expert committee report to price bulk of domestically produced natural gas at 10 per cent of month average import price of crude oil with a floor of USD 4 per million British thermal unit and a cap of USD 6.5, tinkering with the panel's suggestions will help the government avoid prices going up right in the middle of general elections next year.

"City gas distributors could reduce prices of compressed natural gas (CNG), used by vehicles, and piped natural gas (PNG), used by homes, by 9-11 per cent, with the government accepting the key recommendations of the Kirit Parikh Committee," Crisil Ratings said. "Had the previous pricing regime continued, prices would have likely risen."

But the government has not acted on the panel's recommendation to fully deregulate prices in 2027.

"We don't know if the deregulation has been postponed or stalled for now," an industry official said.

Also, the government tinkered with the recommendation of a USD 0.50 per mmBtu annual increase till full deregulation in 2027.

The Cabinet decided that rates will not change for two years and will be increased by USD 0.25 annually thereafter.

This, analysts said, has helped the government avoid an increase in CNG and piped cooking gas (PNG) prices in April 2024 -- when the country would have been in the midst of general elections.

Fuel price hike would have become an election issue, an analyst said.

The Parikh committee had also recommended that gas should be brought under the Goods and Services Tax, or GST, regime. Having a common taxation such as GST for gas in lieu of state level VATs, which vary from 3 per cent to as high as 24 per cent, will help develop the market.

But it is not known if the Cabinet accepted this recommendation.

Crisil said the revised gas pricing norms would lend greater stability to gas prices for city gas distributors and sustained competitiveness with alternative fuels, thus driving demand and supporting massive capex plans.

CNG and PNG prices had witnessed an 80 per cent jump since August 2021, on the back of a surge in international energy prices.

Till now, the price of gas produced from fields covered under the Administered Price Mechanism (APM) regime -- which accounts for 70 per cent of domestic gas production -- was determined semi-annually based on a formula that benchmarked it to average international prices at four gas trading hubs.

APM gas is provided to city gas distributors for supply to CNG and residential PNG segments, which together account for 60 per cent of their sales volume.

APM gas prices have seen wide fluctuations over the years, from a low of USD 1.79 per mmBtu in 2021, to a high of USD 8.57 for the 6-month period ending March 2023.

"Global gas prices have been even more volatile, exacerbated by the ongoing Russia-Ukraine conflict," Crisil said.

As per the key recommendation of the committee accepted by the government, the APM formula is now revised and determined as a 10 per cent slope to crude oil prices, but with a floor and ceiling price of USD 4 per mmBtu and USD 6.5 respectively.

"This would balance the interests of domestic gas producers, while incentivizing the city gas consumers," Crisil said, adding how the pricing regime evolves over the long-term and how policy support continues to the city gas sector will bear watching.

Based on last month's average crude price at USD 78 per barrel, the ceiling price of USD 6.5 per mmBtu will kick in, providing relief to city gas distributors.

Says Naveen Vaidyanathan, Director, CRISIL Ratings, as per the earlier APM regime, gas prices could have risen further to USD 10-11 per mmBtu for the first half of fiscal 2024, from USD 8.57 per mmBtu for the six months ended March 2023, necessitating a price increase, in turn, for city gas distributors to maintain profitability.

Structurally, the revised regime will lead to greater stability in input gas prices for city gas distributors. While the floor price of USD 4 per mmBtu will mean they will not be able to benefit from very low international gas prices, as witnessed during 2016-21, they will be insulated from the very high gas prices -- as was seen in 2015 and since 2022.

"With APM prices now benchmarked to crude oil, it would ensure sustained competitiveness of CNG and residential PNG with alternative fuels such as petrol, diesel, and liquefied natural gas (LNG).

"The CNG discount over petrol and diesel, and residential PNG over LNG will increase to 25-40 per cent under the new regime from 20-35 per cent currently. This can accelerate and sustain adoption of city gas and support distributors that have planned capex of Rs 90,000 crore over the next 4-5 fiscals," said Joanne Gonsalves, Associate Director, CRISIL Ratings.

Following the decision, the CNG price in Delhi is likely to be cut from Rs 79.56 per kg to Rs 73.59 and that of PNG from Rs 53.59 per thousand cubic meters to Rs 47.59. In Mumbai, CNG may cost Rs 79 per kg instead of Rs 87 and PNG may cost Rs 49 per scm instead of Rs 54.

Two different formulas govern rates paid for gas produced from legacy or old fields of national oil companies like Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL), and that for newer fields lying in difficult to tap areas such as deepsea.

The global spurt in energy prices post Russia's invasion of Ukraine has led to rates of locally produced gas climbing to record levels - USD 8.57 per mmBtu for gas from legacy or old fields and USD 12.46 per mmBtu for gas from difficult fields in six month period ending March 31.

At the April 1 revision, the APM gas price was kept on hold pending Cabinet approval for the change in the pricing formula. Had the old formula continued, prices of gas from legacy fields would have climbed to USD 10.7 per mmBtu.

The price of gas from difficult fields was cut to USD 12.12 per mmBtu.

The government had last year constituted a committee under Kirit Parikh to look at a revision in gas prices that balances both local consumer and producer interest, while at the same time advancing the country's cause of becoming a gas-based economy.

India aspires to become a gas-based economy with the share of natural gas in its primary energy mix targeted to rise to 15 per cent by 2030 from the existing level of around 6.3 per cent.

APM gas fields were allotted to ONGC and OIL before 1999. Production from these fields do not attract profit-sharing with the government, and their pricing formula is benchmarked to gas prices at international gas hubs in surplus nations every six months based on the weighted average price. Prices were last revised on October 1 and are now due for revision on April 1.

To incentivize additional production from a new well or well intervention in the nomination blocks, the Kirit Parikh committee recommended a premium of 20 per cent over and above the APM prices for ONGC and OIL till complete freedom. This has been approved by the Cabinet.

As much as 34 per cent of APM gas is allotted to the power sector in 2021-22, 17 per cent to the fertilizer industry, which impacts food prices, and 22 per cent to the city gas sector.