ONGC's Cheaper Gas Supplies Decline, New Well Supplies Double for City Gas Distributors

ONGC's natural gas production from aging fields has dropped, leading to supply reductions for city gas distributors. To offset the decline, ONGC is drilling new wells, but the gas from these wells is sold at a higher price to cover added costs. As a result, city gas distributors are facing a 20% cut in APM gas supplies, which are being partially replaced by more expensive new well gas.

The government has announced a significant reduction in the supply of lower-cost APM gas to city gas distributors (CGDs), such as Indraprastha Gas Ltd (IGL), Mahanagar Gas Ltd (MGL), and Adani Total Gas Ltd, effective April 16, 2025. This reduction, up to 20%, will lead to higher input costs for CGDs and potentially result in CNG price hikes, impacting their profitability.

The cut in APM gas allocation is part of a broader trend of declining natural gas production from aging fields, which has been offset by increased drilling of new wells. However, gas from these new wells is priced at a higher rate to cover the added costs, leading to a shift in the gas supply mix for CGDs.

IGL, one of the major CNG retailers, has reported a 20% reduction in its domestic gas allocation, with the lost volumes being replaced by New Well Gas (NWG) priced at 12% of the Indian Crude Basket. Similarly, MGL has seen an 18% reduction in APM gas allocation, also being replaced by NWG. Adani Total Gas Ltd has reported a 15% reduction in APM gas allocation, with the shortfall being made up by NWG.

The current APM gas price is USD 6.75 per million British thermal units (MMbtu), while new well gas is priced at around USD 8 per MMbtu. This shift in pricing is expected to have an adverse impact on the profitability of CGDs, as they will face higher input costs. The reduction in APM gas allocation also means that APM gas now meets about 34% of the total city gas requirement, down from 51% previously.

The cut in APM gas allocation translates into higher input costs for CGDs, which could result in another CNG price hike by the companies. Sehul Bhatt, Director-Research at Crisil Intelligence, has suggested that CNG players might hike prices by Rs 1-2 per kg to maintain their profitability.

In conclusion, the government's decision to reduce APM gas supply to CGDs will have significant implications for the CNG and piped gas market. CGDs will need to adapt to the new pricing dynamics and explore measures to mitigate the impact on their profitability.

References:
[1] https://m.economictimes.com/industry/energy/oil-gas/govt-cut-cheaper-apm-gas-supply-to-cng-retailers-igl-mgl-adani-total-gas/articleshow/120343800.cms
[2] https://economictimes.indiatimes.com/industry/energy/oil-gas/ongcs-cheaper-apm-gas-supply-falls-costlier-new-well-supply-doubles-for-city-gas-distributors/articleshow/120406315.cms