Near-term margin pressure for city gas distribution majors

Global energy markets are trending down.

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Sanctions on Russia have not disrupted supply, given weak global gross domestic product (GDP) growth and production increases from Opec and non-Opec countries.

Global supply is expected to increase by 2.2 million barrels per day (mbpd) in 2026 (averaging 107.2 mbpd) which will probably mean a net supply surplus of 2-3 mbpd. The benchmark Brent crude may trade below $60/barrel (bbl) mark in 2026. Since administered pricing mechanism (APM) and new well gas (NWG) prices are tied to global prices, which are tied to crude, this may be a positive.

City gas distribution (CGD) companies may clock operating profit of ₹7.2-7.5 per standard cubic metre (scm) in spot imports.

CGD gas has several cost tiers. Lowest prices are under the APM.

Beyond APM, there is NWG and high pressure, high temperature (HPHT) gas, and imported regasified liquified natural gas (R-LNG) under contract and spot.

In H2FY25, APM gas allocated to CNG was reduced to less than 40 per cent of total CNG requirement, compared with 70 percent in H1 FY25. Spot gas is usually 80-100 per cent more expensive than APM. CGD companies have since moved to contracting for long-term supplies to reduce supply risks.