Tuesday, June 18, 2024

CNG, PNG prices may fall 9-11%, says CRISIL Ratings

The prices of compressed natural gas (CNG), used by vehicles, and piped natural gas (PNG), used by homes, could be reduced by 9-11% with the government accepting the key recommendations of the Kirit Parikh Committee, CRISIL Ratings said in a note.

Had the previous pricing regime continued, prices would have risen further.

“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,” the rating agency said.

Till now, the price of gas produced from fields covered under the Administered Price Mechanism (APM) regime—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.

As per a 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, respectively.

“This would balance the interests of domestic gas producers while incentivizing the city gas consumers,” CRISIL Ratings said.

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, it added.

Naveen Vaidyanathan, Director, CRISIL Ratings, said “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,” he said.

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 very high gas prices — as was seen in 2015 and since 2022.

Commenting on the development Vinod Aggarwal, President, SIAM and MD & CEO CECV said “Realignment of the gas pricing mechanism by insulating the Indian consumers from the spikes in global prices will soften prices in India and will provide much needed relief to the transportation sector. This measure will also help in re-igniting interest in CNG vehicles in India.”

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