New pricing norms may make CNG, PNG cheaper by 11%

The new pricing norms, which was approved by the union cabinet on Thursday, are likely to make piped natural gas (PNG) and compressed natural gas (CNG) cheaper by 9 to 11 per cent, CRISIL Ratings said on Friday.

The administered price mechanism (APM) formula is now revised and determined as a 10 per cent slope to crude oil prices, but with a floor and ceiling price of $4 per million British thermal unit (mmBtu) and $6.5/mmBtu, respectively. During the month of March 2023, the average crude price stood at $78 per barrel. On the basis of this, the ceiling price of gas will be $6.5/mmBtu.

“APM prices declining to $6.5/mmBtu could mean a 9-11 per cent cut in CNG and PNG prices, assuming companies pass on the benefit to end-consumers,” said Naveen Vaidyanathan, Director, CRISIL Ratings.

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, Vaidyanathan added. The new gas pricing formula approved by the union cabinet is based on the recommendations of the Kirit Parikh Committee.

The panel, which submitted its report in November 2022, had recommended a floor price and a cap for gas from legacy and old fields. The government has largely accepted the recommendations.

Under the old mechanism, the price of gas produced from fields covered under the 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.

APM gas prices have seen wide fluctuations over the years, from a low of $1.79/mmBtu in 2021 to a high of $8.57/mmBtu for the 6-month period ending March 2023.