Rising Gas Costs Impact City Gas Sector

Source: The post Rising Gas Costs Impact City Gas Sector has been created, based on the article “Gas price rise and Trump’s expected policies” published in “Indian Express” on 2nd January 2025

UPSC Syllabus Topic: GS Paper3-Infrastructures-Energy

Context: The article discusses challenges in the city gas distribution sector, primarily due to reduced allocations of cheaper, regulated gas and increased reliance on more expensive gas sources. This is leading to higher costs and reduced profitability, potentially driving consolidation among companies in the sector. Rising Gas Costs Impact City Gas Sector

For detailed information on India’s gas policy has protected the consumer from global price volatility read this article here

What Are the Main Challenges Faced by the City Gas Distribution Sector?

1. The city gas distribution (CGD) sector is struggling with reduced allocations of cheaper, administered price mechanism (APM) gas, falling from 72% to 44%.
2. This reduction forces companies to depend on more expensive gas sources like high-pressure high-temperature (HPHT) gas or imported regasified liquified natural gas (RLNG), costing up to twice as much as APM gas.

How Are Rising Costs Impacting Sector Profitability?

1. Increased reliance on costlier gas sources is expected to raise costs by Rs 5 per standard cubic meter or Rs 7 per kg, significantly impacting profitability.
2. The domestic piped natural gas (D-PNG) and compressed natural gas (CNG) segments, which account for two-thirds of the sector’s volume, are particularly affected.
3. This shift may result in a projected loss of Rs 2,300 crore in sector profits next year.

What Competitive Pressures Exist in the Market?

1. CNG is losing its cost advantage over diesel, which is particularly impactful in the commercial vehicle sector.
2. With potential U.S. policy changes favoring more drilling and thus possibly reducing diesel prices, CNG’s competitiveness may further diminish.
3. Additionally, the rise of electric buses under the PM e-Bus Seva scheme is cutting into CNG’s market share.

What Does the Future Hold for the CGD Sector?

1. The sector is ripe for consolidation, driven by financial strain and competitive challenges.
2. Larger, financially robust companies might absorb smaller players struggling with high costs and limited access to cheaper gas.

3.This consolidation trend is particularly likely in areas where companies lack strong financial backing, indicating a significant shift in the landscape of the CGD sector.

Question for practice:

Discuss how the reduction in cheaper gas allocations and increased reliance on costlier gas sources are affecting the profitability and competitive dynamics of the city gas distribution sector.