The hike in APM gas prices will not only increase your electricity, transportation and piped gas bills, but may also lead to deregulation of auto fuel prices

The Union Cabinet has hiked administered pricing mechanism (APM) gas prices to $4.2 per million metric British thermal unit (mmBtu) from $1.9 per mmBtu (a rise of 133%), effective from April 2010. Although the industry and analysts were anticipating the move, everyone was surprised by the quantum of the hike. They believe that the hike in APM gas prices would be followed by deregulation of auto fuel prices. This may happen as early as the first week of June.

"While an APM gas price hike was on the cards, the quantum (of the hike) has taken us by surprise. We were expecting a gas price increase of 30% and 20% in FY11E and FY12E respectively. The increase, however, is in line with the finance ministry's stance of bringing APM gas price in parity with KG gas price at one go," said Ambit Capital Pvt Ltd, in a note.

The APM was created after the government nationalised the international oil majors—Caltex, Esso and Burmah Shell—in the early 1970s. For ONGC, out of its total production, about 97% is APM and 3% is non-APM while in case of OIL, out of its total production, around 88% is APM and 12% is non-APM.

While the move to increase APM gas prices would be positive for State-run oil companies like ONGC Ltd, GAIL Ltd and OIL Ltd, it may impact city gas distribution companies such as Mahanagar Gas Ltd, Indraprastha Gas Ltd and Gujarat Gas Co Ltd. ONGC and OIL would be able to sell gas from their respective fields at par with the price of Reliance Industries Ltd's (RIL) Krishna-Godavari Basin gas.

The government's decision to hike the APM gas price may shut doors for Reliance Natural Resources Ltd (RNRL) to get gas at lower rates from RIL. Following the Supreme Court verdict, currently both companies are negotiating the price of gas to be supplied by RIL.

"(It’s) most likely (that) under the terms of (the) production sharing contract (PSC), RNRL will be asked to purchase gas from RIL at price of $4.2 per mmBtu as fixed by the government. Hence, we feel that the possibility of RIL selling gas at lower than $4.2 per mmBtu is bleak. At this price or closer to this price, serious concerns arise over the viability of RNRL’s business model," said Kisan Ratilal Choksey Shares and Securities Pvt Ltd in a note.

With the hike in APM gas price, the power and fertiliser sectors will have to bear an additional burden of over Rs10,000 crore. However, the major burden will be borne by the Union government in form of fertiliser subsidies and the State governments of Andhra Pradesh, Maharashtra and Gujarat in form of power subsidies.

"Given that the APM gas price hike is a pass-through for power companies, higher fertiliser subsidies of about Rs50,000 crore would be partially offset by lower power subsidies. However, as a signalling mechanism, in conjunction with the earlier fertiliser subsidy reforms (nutrient-based subsidy regime), this would boost investor confidence in the government's commitment to go ahead with reforms in other areas including auto fuel deregulation," Ambit Capital added. According to analysts, the hike in APM gas price would lead to an increase of about 2% to 3% for electricity tariffs, while compressed natural gas (CNG) prices will go up by 20%.

With the impending meet of the Empowered Group of Ministers (EGoM) likely in the first week of June, to spell out the government's stance on auto fuel price deregulation, any reforms in the auto fuel space would act as a big boost in bringing down the fiscal deficit.

Currently, gas produced by ONGC and OIL is sold to power and fertiliser companies at APM rate of Rs3,200 per thousand metric standard cubic metres (mscm) across the country, except the north-eastern states. The same gas is sold at non-APM rates of $4.75 per mmBtu in Gujarat and Maharashtra, which excludes royalty, transportation charges and taxes.

While increasing the APM gas prices, the Union Cabinet also allowed GAIL to charge a marketing margin of 11.2 cents per mmBtu or Rs200 per 1,000mscm on APM gas sales.

Gas distributors like Indraprastha Gas procure around 85% of their supplies at APM rates of Rs3,800 per 1,000mscm. The APM gas price hike would increase Indraprastha Gas' blended costs by about 50%. In order to maintain its gross margins, the company may have to hike retail gas prices by 10% to 15%, but whether it can pass on the cost increase to consumers, it remains to be seen.

Officials of Indraprastha Gas were not immediately available for comments.— Yogesh Sapkale