Realignment of domestic gas prices can be a headwind for CNG: Jefferies

Fixing a floor price for domestic natural gas can be a headwind for compressed natural gas (CNG) business and narrow down the margin expansion headroom for the suppliers of this fuel, analysts at Jefferies have said.

“Any potential floor to APM gas cost could hurt the CNG segment but we think economics could be fine as long as APM gas is below $5 per million British thermal units (mBtu) although future margin expansion headroom could narrow,” the brokerage firm said. Companies such as Mahanagar Gas and Indraprastha Gas derive around 75% of their revenue from CNG, while the exposure is lower for Gujarat Gas.

To salvage domestic gas producers, currently facing under recoveries, the government has formed a committee to modify the formula for determination of gas prices. Tariffs of gas from nominated (APM) fields might be linked with the Japan Korea Marker (JKM) benchmark, and a floor price can also be fixed to not let rates fall below a certain threshold. Currently, domestic gas price is linked to the weighted average price of four global benchmarks (US, UK, Canada and Russia), where rates are lower than JKM prices.

Retail prices of CNG may see hikes of as much as 18%, if the price of domestic gas is linked with the JKM benchmark rates, analysts at Credit Suisse recently said.

Edelweiss Securities had pointed that linking prices to JKM might raise domestic gas rates by $2/mmBtu, but added that even at these levels, “CNG will continue to be highly competitive at 37% cheaper than diesel”. The Union government recently slashed domestic gas prices from nominated fields to record low levels of $1.79/ mBtu as higher production and coronavirus-induced low demand has suppressed global gas prices.