Policy change may pose risk to city gas entities
New Delhi: With softer gas prices propping up CNG and piped cooking gas consumption, city gas distribution (CGD) entities will continue to see robust margins but any adverse change in the policy of gas allocation is a key risk for the industry's profitability, ratings agency ICRA said.
The volume consumption of compressed natural gas (CNG) by automobiles and piped natural gas (PNG) in domestic kitchens has been witnessing an increasing trend, supported by softer gas prices in the last 2-3 years, ICRA said in a statement on a report it has prepared on the domestic CGD sector.
"Going forward, demand growth favours CGD entities over the next decade and their margins are expected to remain healthy," ICRA Senior Vice President K Ravichandran said. Economics, he said, are favourable for CNG, with piped natural gas for industrial use (PNG-industrial) may be marginally profitable.
"The industry will benefit from the Central Government's volume push but any adverse change in domestic gas allocation policy will be a key risk for the sector's profitability and viability," he said.
Currently, CGD entities get first priority in the allocation of cheap domestically produced natural gas. This gas is converted into CNG for sale to automobiles and piped to household kitchens for cooking purpose as well as to industries to meet their fuel needs.
ICRA's Ankit Patel said the Supreme Court ban on the use of petcoke and furnace oil in a bid to control pollution in the national capital region would mean that industrial units need to shift to alternate fuels such as natural gas.
This would further boost demand for PNG for industrial use over the short to medium term, he said.
"The margin of CGD entities has improved in the last three years supported by CNG, despite cost-push factors like the relatively higher cost of energy at existing R-LNG prices, the depreciation of the rupee versus the dollar and the weak industry demand and competition from alternate fuels," the statement said.