Given the rise in global crude oil and natural gas prices, analysts expect the price of domestic gas to increase by 128% for the April-September period next fiscal year. This could inflate CNG prices and make piped natural gas more expensive for households, hotels and restaurants. Electricity and fertilizer companies, which use gas as fuel and feedstock respectively, could also feel the effects.

Jefferies analysts estimate that the government domestic gas price cap will drop from the current level of $3.2/mBtu (net calorific value basis) to $7.3/mBtu for April-September 2022 and at $8.2/mBtu for the next six months.

The Union government in September 2021 had raised the price of domestically produced gas by 62% to $2.90 per million British thermal units (mBtu), the drop in production amid increased demand increasing gas prices in North America and Europe. The price cap for gas to be produced from difficult fields – which have higher pricing and marketing freedom – had been raised by 69% to $6.13/mBtu. These prices are based on the higher calorific value. The price of domestic gas is linked to the weighted average price of four world references (United States, United Kingdom, Canada and Russia).

Domestic gas is the feedstock for Compressed Natural Gas (CNG) and Residential Piped Natural Gas (PNG) and constitutes approximately 85% of gas supply for Indraprastha Gas and Mahanagar Gas, and approximately 15% for Gujarat Gas. Sharp increases are deemed necessary in CNG prices to pass on rising gas costs. “Our analysis suggests a neutral CNG price on the margin of 75/65 at $7.3/mbtu and83/72 at $8.8/mbtu in Delhi/Mumbai respectively compared to the current prices of `66/53 in Mumbai/Delhi,” Jefferies pointed out, adding that “given the higher prices of gasoline and diesel, CNG economics would remain attractive with a 30-50% reduction on diesel/petrol at $7.3/mmbtu and a 25-45% reduction at $8.8/mmbtu.”

Spot liquefied natural gas prices in Asia hit multi-year highs at over $30/mBtu on strong regional demand and Henry Hub prices rose to around $4/mBtu from around $2.4 /mBtu in one year. Much of the spike in gas prices in Europe – which soared to $26/mBtu from $7/mBtu a year ago – was triggered by the delay in the approval of the Nord Stream 2 gas pipeline and the decline gas stocks as the winter season approaches.

Fortunately, the rise in international gas prices coincided with a substantial increase in domestic gas production, helping to reduce dependence on natural gas imports from 55% in April-November 2020 to 47% during the corresponding period in 2021. City Gas Distribution (CGD) – the second largest consumer of natural gas in the country – obtains cheaper domestic gas under the Administered Price Mechanism (APM) for domestic PNG and CNG categories. For some extremely price-sensitive user industries like the electricity sector, a landed price of more than $6-8 per mbtu makes continued operations unsustainable.

Domestic natural gas production increased 19.5% to 2,896.7 million standard cubic meters (mscm) in December on a yearly basis (YoY), mainly due to increased production from Reliance Industries and the field in ultra-deep water from BP in the KG-D6 Block of the Krishna Godavari basin on the east coast. Production had fallen 8.1% YoY to 28,670.6 mscm in FY21 but then increased 21.5% YoY to 25,673.9 mscm in the April- December of the current fiscal year.

Production also began Aug. 31 from state-owned Oil and Natural Gas Corporation’s U1B deepwater gas well, located in block KG-DWN 98/2, which has an estimated peak production of 1.2 million standard cubic meters per day.