On September 30, 2022, the Ministry of Petroleum and Natural Gas increased the price of natural gas by 40% to an all-time high of $8.57/mmbtu (metric million British thermal unit) for the second half of the current fiscal, based on the administered pricing formula¹ (APM).

This followed a 110% increase already applicable for the first half. The APM gas is supplied largely to compressed natural gas (CNG) and domestic piped natural gas (PNG) consumers, who contribute to 50% and 10% of city gas volume, respectively.

The price for the balance 40% of city gas volume - supplied to industries - have also surged and remain elevated amid the protracted Russia-Ukraine conflict. Over the past 12 months, the average price of liquefied natural gas (LNG) contracts, benchmarked against crude oil prices, rose ~45% to $14.5-15.0 per mmbtu, while spot LNG prices have surged ~150% to $38-40 per mmbtu.

Expected sustenance of these high gas prices will moderate India’s city gas consumption volume growth to 8-10% this fiscal versus an earlier projection of 20-25%².

CRISIL Ratings’ analysis of five large city gas distributors³, which account for almost 70% of the industry’s volume, indicates as much.

Says Naveen Vaidyanathan, Director, CRISIL Ratings, “Elevated gas prices are expected to reduce demand for industrial PNG by 10-12% this fiscal, as price-sensitive industrial consumers switch to alternative fuels such as propane and fuel oil. Demand for residential PNG, although more resilient to higher prices, may also grow a modest 2-5% as employees return to office with the Covid-19 pandemic subsiding. CNG demand is still expected to rise 25-30% on the back of an expanding network of CNG stations⁴ to new geographic areas and higher sales of factory-fitted CNG cars⁵, despite narrowing price differential with competing petrol and diesel.”

Overall, we expect full year demand to moderate to 8-10% this fiscal amidst surge in gas prices.

To counter, city gas distributors have been taking successive price hikes since April 2021 to manage their cost pressures. To illustrate, CNG prices having increased by a massive 75% as prices of competing crude oil-linked petrol and diesel have also increased.

This may change, as Says Joanne Gonsalves, Team Leader, CRISIL Ratings, “City gas players may now face margin headwinds as they balance between protecting margins and driving volume growth. While we expect margins to fall from the levels of Rs 8.82 per scm (standard cubic meter) seen in the first quarter of this fiscal, however for the full year, these may still be healthy at ~Rs 8.0 per scm - almost flat on-year and ~12% higher than the last 5-year average.”

Decent volume growth and healthy margins will drive an improvement in cash accruals this fiscal. This, along with robust balance sheets and low sector gearing of 0.1x as of March 31, 2022, will support the industry’s plans to further expand its network, especially in the newer geographic areas.

That said, any adverse changes in gas allocation or the pricing policy would bear watching.

¹ Ministry of Petroleum and Natural Gas sets the domestic administered gas prices on a half-yearly basis based on international gas prices at major trading hubs. This pricing formula is being reviewed by a committee
² 20-25% growth in city gas volume was expected as of March 2022
³ Gujarat Gas, Indraprastha Gas, Mahanagar Gas, Adani Total Gas and Maharashtra Natural Gas
⁴ The number of CNG stations increased from 3,101 in March 2021 to 4,664 in July 2022
⁵ 1.97 lakh new CNG vehicles were registered in CY2022 until September 30, up sharply from 1.65 lakh vehicles registered in entire 2021