Oil Ministry freezes gas allocation, prices of CNG, PNG spike

The oil ministry has not made any fresh allocation of natural gas from domestic fields to the city gas sector, sending CNG and piped cooking gas prices to record highs but the ministry insisted that allocations have not been stopped and providing more for the sector would lead to cut in supplies to industries like power and fertiliser.

Despite a decision of the Union Cabinet to give 100 per cent gas supply under ‘no cut’ priority to the city gas distribution (CGD) sector, current supplies are at March 2021 demand level. This has driven city gas operators to buy high priced imported LNG to make up for the shortfall, leading to a record spike in prices, three sources aware of the matter said.

Commenting on the issue, the ministry said it “is waiting for the updated data for the period October 2021 to March 2022 from CGD entities for the allocations in April 2022. This is yet to be received from the entities.”

The ministry is supposed to make an allocation of domestic natural gas, which costs a sixth of imported LNG, every six months — in April and October every year — based on verified demand in the previous six months. But no allocation has been made since March 2021, sources said.

Responding, the ministry said: “Based on data of October 2020 to March 2021 consumption, the allocation for April-October 21 was revised as per the guidelines in April last year.”

CGD operators have been requesting the ministry to maintain the gas supply to the sector under no cut category with last 2 months average to ensure demand of both CNG and piped natural gas (PNG) for homes is fully met but the ministry has not made any fresh allocation for over a year now, the sources said.

“CGD entities have requested for quarterly allocation. The same is under consideration,” a ministry spokesperson said. “Additional allocation for CGD would require cut in supplies to competing demand centres viz fertiliser, power, LPG plants.”

Besides the shortfall in the allocation, the prices of administered pricing mechanism (APM) gas for CNG and PNG has been revised from USD 2.90 per million British thermal unit to USD 6.10, an increase of 110 per cent.

While the demand has grown at a rapid pace in existing cities with CNG networks and supplies starting in newer areas, lack of allocation from domestic fields meant that operators bought imported liquefied natural gas (LNG) at prices that were at least six times the domestic rate.

Result — CNG prices have risen by 60 per cent or over Rs 28 per kg in one year and PNG by over a third.

Sources said this has put a question mark on the economic viability of the entire CGD sector, putting at risk the planned Rs 2 lakh crore investment in expansion into newer cities as high prices bring the CNG at almost par with diesel and petrol, eroding the incentive for users to convert vehicles to the cleaner fuel.

City gas projects are essential for meeting the government target of raising the share of environmentally friendly natural gas in the country’s primary energy basket to 15 per cent by 2030 from current 6.7 per cent.

Cutting domestic gas supplies to such projects would impact the progress in achieving the target, the sources said.

The oil ministry had on August 20, 2014 issued revised guidelines, promising allocation of gas from domestic fields to city gas operators every six months based on a demand assessment of CNG and PNG in a particular geographical area (GA).

This was used as a selling point to bid out over 200 GAs since 2018, attracting over Rs 2 lakh crore of investment commitment in the rollout of city gas distribution infrastructure.

But the gas allocation was not increased at the April 2021 review and the subsequent cycles, they said, adding against the requirement of 22 million standard cubic metres per day of gas, the CGD sector is getting 17 mmscmd from domestic fields.

The balance is met by buying imported LNG, which in the current month costs USD 37 per mmBtu, they said. This compares with the USD 6.10 per mmBtu rate for domestic gas.

“The domestic gas price saw a massive 110 per cent increase – from USD 2.9 per mmBtu to USD 6.1 from April 1. This itself puts a huge burden and on top of this being forced to buy even higher-priced imported LNG will turn this sector economically unviable,” a source said.

New GAs that were bid out in CGD Rounds IX, X and XI are now coming up and no gas allocation being made would mean they will have to buy imported LNG for supplying as CNG to automobiles and PNG to household kitchens.

“GAs with just imported LNG would mean a price of Rs 100-105 per kg,” another source said.

This compares to the price of Rs 71.61 per kg in Delhi and Rs 72 in Mumbai, where nearly 70 per cent of the requirement is met by domestic gas.

“The CGD sector is in a bad shape. It is already facing an onslaught of EVs and now high prices of CNG will be a bid deterrent for diesel or petrol vehicles to convert to CNG.

“CNG is an environmentally-friendly fuel but ultimately what matters is cost economics and if the conversion and running cost comes to be higher than diesel or petrol, no one will convert,” the first source said.

Earlier this month, CGD operators met Oil Secretary Pankaj Jain over the issue.

“The ministry only heard out CGD entities and did not make any suggestion/decision,” the ministry spokesperson said.

The ministry is not increasing the allocation for the CGD sector as it would mean cutting supplies to other sectors such as fertiliser.

“Domestic gas supplies are finite. If we have to increase supplies to one sector, it has to come at the cost of supplies to other sectors. Already the government is facing a higher fertiliser subsidy bill this fiscal and the subsidy outgo will increase further if the fertiliser plants are to use higher priced imported LNG to make urea and other crop nutrients,” a ministry official said.