Government Likely to Cut APM Gas Allocation for CGD, Impacting IGL and MGL

The government is likely to cut APM gas allocation to City Gas Distribution (CGD) by 15-20% starting October 16. This unexpected decision means a reduction of 4 million metric standard cubic meters per day (mmscmd) of APM gas for CGD, with the gas redirected to the ONGC OPAL plant.

Currently, the CGD segment receives 65-70% of its gas from APM, but this percentage has been decreasing by 2-3% each quarter due to limited APM production.

CGD companies will need to replace the lost APM gas with more expensive market-priced non-APM gas or spot/long-term LNG. However, both non-APM gas (available through IGX but not in large quantities of 4 mmscmd) and long-term LNG contracts are not readily available.

In the meantime, CGDs must compensate for the shortfall with costly spot LNG priced at $13/mmbtu or non-APM gas at $10.2/mmbtu, compared to $6.5/mmbtu for APM gas. For most CGDs, the cost of gas will increase by $0.6-1/mmbtu depending on whether they replace it with non-APM or spot LNG.

CGDs will have to raise gas prices for consumers to cover these rising costs, expecting an increase of Rs 2-3.5 per kg (3-5%) for CNG in the coming days, which will affect the volume growth of CNG.

Indraprastha Gas (IGL) has confirmed a 21% reduction in its domestic gas allocation, which is expected to negatively affect the company’s profits. This news has led to a decline in the stock prices of IGL and other city gas distributors like MGL and Gujarat Gas.

IGL received a notification from GAIL India, the agency responsible for domestic gas distribution, confirming the reduced allocation. The new allocation is about 21% lower than what the company was previously receiving, which will hurt its profitability.

IGL has confirmed that it is unsure whether it will raise prices to offset the higher costs of sourcing gas. The company is in talks with important stakeholders to try to lessen the impact. Currently, IGL is purchasing CNG at $6.5 per mmbtu, a price set by the government, while the market price for LNG is over $11 per unit.

CITI on City Gas Distribution (CGD)

Media reports and discussions with CGD companies indicate that the government has reduced the allocation of domestic gas (APM gas) to the CGD industry by 4 mmscmd.

If this continues without any government relief, CGD companies may need to raise CNG prices by Rs 5 per kg to maintain their profit margins.

For companies like IGL and MGL, this would result in a 7% increase in CNG prices.

In MGL’s case, state elections in Maharashtra could make it harder to implement the price hike at the right time.

A price increase could negatively affect the outlook for CNG segment’s volume growth and may create uncertainty about the government’s support for the CGD sector.

Update

Shares of Indraprastha Gas and Mahanagar Gas dropped by up to 14% after it was announced that the gas supply priority for city gas distribution (CGD) companies would be significantly reduced. The supply allocation will now be around 50%, down from the current level of 70%.

Earlier in FY24, the allocation was above 85%, and while it had been steadily decreasing to 72%, this is the largest single reduction so far. Both companies expect their profits to be negatively affected and are in talks with important stakeholders to reduce the impact.