The Central government has reduced the supply of domestically produced natural gas to city gas retailers by up to 20%, potentially driving up CNG prices by Rs 4-6 per kilogram unless excise duty is cut, according to reports.
The gas, which is extracted from domestic fields in the Arabian Sea and Bay of Bengal, is a key raw material for producing compressed natural gas (CNG) used by automobiles and piped natural gas (PNG) for household cooking.
The ongoing decline in gas production from these legacy fields has been a contributing factor, with output falling by 5% annually. As a result, city gas distributors are being forced to rely on costlier imported liquefied natural gas (LNG) to meet demand, further exacerbating the price hike, sources close to the situation revealed.
Supply Cuts For CNG And Rising Costs
For now, the government has ensured that the supply of gas for piped cooking gas to households remains intact. However, the supply for CNG production, which caters primarily to the transport sector, has seen drastic cuts. In May 2023, around 90% of the CNG demand was met through domestic gas supplies. As of October 16, this has dropped to 50.75%, compared to 67.74% the previous month.
This shortfall is forcing city gas retailers to turn to more expensive imported LNG, priced between $11-12 per million British thermal units (mmBtu), compared to $6.50/mmBtu for domestically produced gas. Consequently, CNG prices are expected to increase by Rs 4-6/kg, depending on the region.
Possible Excise Duty Reduction To Alleviate Impact
Despite the imminent price hike, gas retailers have refrained from increasing CNG rates while they hold discussions with the Ministry of Petroleum and Natural Gas to find a solution. One proposed remedy is a cut in excise duty on CNG, which currently stands at 14%, translating to Rs 14-15 per kg. A reduction in this duty could prevent gas retailers from passing the increased costs onto consumers, offering some respite, particularly as the country heads into election season.
The potential price increase could become a politically charged issue, especially with upcoming state elections in Maharashtra and Delhi—both key markets for CNG.
Impact Of Reduced Gas Allocation
The reduction in domestic gas allocation follows a decision to restore supplies to the ONGC-promoted petrochemical plant, OPaL, in Dahej, Gujarat. This plant, which was originally allocated 4.12 million standard cubic meters per day of gas, had seen its supplies halved during the COVID-19 pandemic. As part of a government-approved revival package for the unit, ONGC will infuse Rs 10,501 crore in equity, and the plant will receive increased supplies of domestic gas.
This reallocation of resources has affected city gas retailers, leading to a reduction in their domestic gas supplies.
Industry experts have raised concerns over the rising costs for city gas distributors. Girish Kadam, Senior Vice President at Icra Ltd, noted that the reduction in domestic gas allocation will push gas distributors to rely on more expensive alternatives like high-pressure high-temperature (HPHT) gas and LNG, thus raising overall costs for the sector.
City gas distribution companies like Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL) have already reported an adverse impact on their profitability due to the cuts. IGL disclosed that its domestic gas allocation has been reduced by 21%, while MGL is exploring alternative gas sourcing options to mitigate the financial strain. Adani Total Gas Ltd has also been impacted, reporting a 16% reduction in its domestic gas allocation as of mid-October.
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