New gas price policy positive for city gas distributors, oil producers

The gas pricing policy has seen crucial changes at the behest of the Kirit Parikh Committee’s recommendation. The administered price mechanism (APM) for domestic gas will be priced at 10 per cent of the price of India’s crude basket but with a cap of $6.5 per Metric Million British Thermal Unit (mmBtu) and a floor of $4. The price band will be gradually hiked at 0.25/mmBtu per year after keeping it stable for two years.

Prices will be adjusted every month, according to formula within the band. 

While this lowers the price from the prevailing $8.6/mmbtu, it will also not be revised every six months as was the earlier system. In effect, the ceiling will be hit if crude prices are trending above $65/mmbtu or equivalent. Under the earlier system, APM prices were tied to the price of gas at Henry Hub, which was the benchmark contract for the earlier mechanism. 

One key factor is that OIL (Oil India) and ONGC will have net positive realisations even at the floor price of $4/mmbtu since their costs are around $3-3.25. City Gas Distributors receive some relief in case of high crude prices due to the ceiling but they will not see periods of extremely low gas prices when they could make super-normal profits because of the floor.

Gas from a new field could be sold at 20 per cent premium to APM. The assured profits for domestic gas producers could see investment flows into ONGC, OIL, etc., but there may be pressure on gas distributors if crude prices stay elevated. OIL, which is trying to generate higher volumes from new drilling, could be a larger beneficiary since it might pick up the premium on new fields. 

This formula is currently positive for CGD (city gas distribution) companies and particularly so for IGL (Indraprastha Gas) and MGL (Mahanagar Gas). CGD companies have cut CNG prices by Rs 6-8/kg passing on some of the $2.1/mmbtu reduction in APM gas cost. IGL’s guidance of an earnings before interest, tax, depreciation and amortisation (Ebitda) margin of Rs 8/scm (standard cubic meter) is now highly achievable and may be exceeded. MGL will see similar trends in better margins but it has cut CNG prices more. Gujarat Gas has industrial exposure, which makes profitability and demand more variable than IGL and MGL but Gujarat Gas has seen volume growth. While the Committee had suggested deregulating price for domestic APM from Jan’27 and HPHT (high pressure high temperature) gas (produced by RIL and ONGC from difficult fields) from Jan’26 onwards, the Cabinet is silent on that proposal. 

Market analysts are somewhat divided on the CGD companies and on OIL and ONGC. Some see the current APM reduction as a positive for CGD while being unhappy about the floor since that would prevent CGD companies making very high profits when crude prices are low.

The share price of Gujarat Gas has lost ground since the change in pricing was announced, while IGL and MGL have gained ground and so have OIL and ONGC.