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CNG prices may pinch as cheap gas quota is cut sharply for distributors

New Delhi: The government has sharply cut allocation of cheap domestic natural gas to city gas distributors, which is likely to raise overall gas procurement cost for these companies and prompt them to increase prices of compressed natural gas (CNG).

The government allocates price-controlled domestic gas, or APM gas, to city gas distributors for further sale to CNG drivers as well as to households for cooking. Supplies meant for cooking remain unaffected by the government decision but those for CNG have been cut, city gas executives said.

The share of APM gas in the CNG sales of city gas companies has fallen from around 88% in October to around 80% currently, an executive at a city gas distributor told ET. This would fall further to 75-76% from mid-December, he added. By comparison, APM gas comprised more than 90% of the city gas companies’ CNG sales late last year.

A government official said the reduction in APM allocation is ‘temporary’ and on account of lower production by ONGC. The state-run explorer is taking steps to increase supplies, he added.

City gas distributors are allocated domestic gas based on their consumption in the preceding quarter. Lower APM allocation means the companies will have to meet the shortfall with increased sourcing of high-cost domestic gas available from fields that can sell at market prices or buy costlier imported gas. Domestic deep-sea gas is currently selling for $9.96 per mmbtu compared to the APM price of $6.5. Imported gas under a long-term contract costs around $11-12.

Higher input costs may push companies to increase CNG prices. Last week, Indraprastha Gas Ltd, which operates in the national capital region, raised CNG prices by Rupee one per kg. More price hikes could follow across the country.Gas produced by legacy fields operated by ONGC and Oil India are subject to price restrictions and are made available to city gas companies. Since these fields are limited and ageing, their overall output has been declining. At the same time, there has been a steady rise in CNG demand. City gas distribution licenses for most of the country’s districts have been awarded over the last five years.The price-controlled gas from legacy fields is also allocated to other consumers such as fertiliser makers and power companies.

APM gas, priced at 10% of the Indian crude basket price, is subject to a floor of $4 per mmbtu and a ceiling of $6.5 per mmbtu, according to a new pricing formula introduced by the government in April. The effective APM gas price has been $6.5 per mmbtu since April as crude has mostly traded above $70 per barrel.

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