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MOSL: OIL & GAS-Are CGDs under threat of losing domestic gas allocation?

Oil & Gas: Are CGDs under threat of losing domestic gas allocation?

 

• The last few days saw a sharp decline in the share prices of IGL (~11%) and MAHGL (~9%) following that a High Powered Committee has recommended quashing the supply of domestic gas to CNG and PNG (residential).
• However, our research and interaction with various companies and experts suggest that implementation of the recommendation is highly unlikely.
• We remain positive on City Gas Distribution (CGD) companies - IGL IN, MAHGL IN and GUJGA IN. Nonetheless, implementation of the recommendations would result in substantial de-rating of the CGD stocks.

Domestic gas allocation

• In 2012, the Gujarat High Court ruled that there should be no discrimination in allocation of gas to CGDs. Subsequently, in 2013, the Ministry of Petroleum and Natural Gas (MoPNG), in a directive, ordered GAIL to allocate 6.4mmscmd of gas for CNG and PNG (residential) segments.
• This allocation was placed under the “no cut” category. The order further stated that requirement beyond 6.4mmscmd “may be sourced… through RLNG or any alternative source…”
• Subsequently, in 2014, the MoPNG revised allocation guidelines. It raised allocation of domestic gas to 8.32mmscmd and placed it under the “no cut” category. It also noted that “while every effort will be made to meet 100% of CNG and PNG (residential) requirement from domestic gas…it may need to be supplemented…through imported RLNG, depending upon the availability of domestic gas.”

Is domestic gas priced at a concessional rate?

• The existing pricing formula of domestic natural gas (approved in 2014), linked it to the weighted average of gas prices prevailing in the four international hubs.
• The philosophy of the formula was stated in the statement, “The twin objectives of expediting production and avoiding cartelization can be achieved by ensuring that producers in India get at least the average price of what producers elsewhere are getting.”
• Hence, while some claim that the CGDs get access to gas at concessional rate, we believe otherwise.