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%¹, with the government accepting the key recommendations of the Kirit Parikh Committee. Had the previous pricing regime continued, prices would have likely risen.

This 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.

Till now, the price of gas produced from fields covered under the Administered Price Mechanism (APM) regime² — which accounts for 70% of domestic gas production — was determined semi-annually based on a formula that benchmarks it to average international prices at four gas trading hubs. Under this, gas is provided to city gas distributors for supply to CNG and residential PNG segments, which together account for 60% of their sale volume.

Crucially, APM gas prices have seen wide fluctuations over the years, from a low of $1.79 per million British thermal unit (mmBtu) in 2021 to a high of $8.57/mmBtu for the 6-month period ending March 2023. Global gas prices have been even more volatile, exacerbated by the ongoing Russia-Ukraine conflict.

As per the key recommendation of the committee accepted by the Government, the APM formula is now revised and determined as a 10% slope to crude oil prices, but with a floor and ceiling price of $4/mmBtu and $6.5/mmBtu, respectively³. This would balance the interests of domestic gas producers while incentivizing the city gas consumers.

Basis last month’s average crude price at $78 per barrel, the ceiling price of $6.5/mmBtu will kick in, providing relief to city gas distributors.

Says Naveen Vaidyanathan, Director, CRISIL Ratings, “APM prices declining to $6.5/mmBtu could mean a 9-11% cut in CNG and PNG prices, assuming companies pass on the benefit to end-consumers. In contrast, as per the earlier APM regime, gas prices could have risen further to $10-11/mmBtu for the first half of fiscal 2024 from $8.57/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 $4/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.

Says Joanne Gonsalves, Associate Director, CRISIL Ratings, “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% under the new regime from 20-35% 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.”

How the pricing regime evolves over the long term and how policy support continues to the city gas sector will bear watching.

¹ Assessed for Mumbai and Delhi
² Includes nominated blocks, NELP blocks and pre-NELP blocks with production sharing contracts requiring government approvals
³ It would be computed as 10% of monthly average of Indian Crude Basket (sourced from Platts). The ceiling price would increase by $0.5/mmBtu each year