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Informist, Wednesday, Apr. 1, 2026

 

By Anand JC

 

NEW DELHI – The Centre's push towards the adoption of piped natural gas as a means to keep kitchen stoves burning is unlikely to boost the margins of city gas distributors, at least in the near term, despite the segment being a relatively high-margin proposition for these companies, analysts said. Domestic PNG connections account for a small part of city gas companies' businesses and other major segments such as gas supply to the transport sector have seen suppressed margins in recent years.

 

The Ministry of Petroleum and Natural Gas last week announced sweeping reforms to boost the adoption of PNG across the country by tweaking frameworks surrounding the laying, expanding, and operating of natural gas and petroleum pipelines. The ministry asked households to switch to piped gas wherever pipe infrastructure was available within three months of receiving a formal communication from the government, or risk losing the supply of liquefied natural gas.

 

City gas distributors may gain from this move as penetration in this higher-margin segment would improve, given the low current usage, said Harshraj Aggarwal, analyst at Yes Securities, who tracks the sector. "Wherever there are existing connections, they can quickly benefit by adding higher volumes," he said. The benefits may accrue only in the long run for these companies, as customer adoption will take time.

 

Immediate and significant benefits are unlikely for city gas companies because of slower customer adoption and very low penetration rates. There are many instances in which pipeline infrastructure is available, but consumers continue to prefer using traditional LPG cylinders. Additionally, providing pipeline infrastructure in non-metro cities means higher capital expenditure for city gas firms. "Capex per connection is lower in metros because the cost is divided by a higher number of customers as more people live in taller buildings, so it's cheaper for the company," Aggarwal said. In areas with limited multi-storeyed residences and more individual houses, capex for city gas firms goes up, and it can take years to recover the investment.

 

Analysts expect household PNG connections to increase in the near term, but nowhere near enough to replace the current preferred source – LPG. As of March, India had around 330 million active domestic LPG consumers, compared to 15 million PNG users. Structural constraints mean PNG users may go up to only around 20 million in the near term, said a Mumbai-based analyst tracking the sector.

 

The CNG segment, a major volume business for city gas distributors, has limited these companies' margin growth in recent years. Allocation of natural gas to the transport sector has been cut drastically in recent years due to the lower availability of cheaper gas under the administered pricing mechanism. The government has diverted cheaper gas for household use in recent years from industrial and transport use. In addition, the limited pass-through of expensive gas to consumers has hampered volume growth.

 

BENEFIT FOR OMCs

India's reliance on LPG as a fuel for household consumption has historically been a sore point for the financials of oil marketing companies, given the politically sensitive nature of the commodity. When these oil marketing companies – Hindustan Petroleum Corp. Ltd., Bharat Petroleum Corp. Ltd., and Indian Oil Corp. Ltd. – buy crude oil at a higher price from the international market, they are often forced to sell the refined fuel at a lower price, which leads to financial losses.

 

"Recent softer crude prices had supported healthy marketing margins; however, with crude prices rising again, margins have compressed to their lowest levels since mid-2022. This reflects the degree to which OMCs are currently absorbing higher costs to shield consumers from a full pass-through to retail prices," Emkay Global Financial Services Ltd. said in a report. To add to the government's worries, most major OMCs are state-run, which means any price absorption by them is effectively a fiscal cost.

 

Greater use of PNG, instead of LPG, by households may help oil marketing firms reduce these losses, termed under-recoveries. "As it is, the LPG segment is a loss-making business for the OMCs. They have to be constantly worried about the under-recoveries (paid by the government to compensate the companies), which aren't recovered most of the time or are paid in a lagged or delayed manner," Aggarwal said.

 

"For OMCs, domestic LPG has been a product with under-recoveries for most part of the last two-three years, so lower volumes of the same would lead to lower under-recoveries," Prashant Vashisth, vice-president and co-group head – corporate ratings, ICRA Ltd., said. 

 

RATIONALE BEHIND MOVE

The Centre has pushed through these reforms at a time when global energy supply chains are in flux because of the ongoing war in the Persian Gulf, where the US and Israeli strikes on Iran over the last four weeks have resulted in a near-shutdown of the Strait of Hormuz. India imports nearly 60% of its LPG and 50% of its liquefied natural gas requirements, most of which flows through this crucial chokepoint. India processes the imported LNG to meet its domestic requirements.

 

Unlike LPG, which comprises propane and butane and is stored under pressure in cylinders, PNG supplies methane, which is delivered through pipelines and is considered to be a safer and cheaper alternative. Analysts say PNG supplied to households currently forms roughly 8% of the city gas distributors' volumes, which means there is significant headroom for growth, though incremental demand may still need imported LNG.

 

According to the government, India produces 92 million standard cubic metres per day of natural gas domestically, against an overall requirement of 191 mscmd. "For PNG (domestic) supplies, natural gas is sourced from domestic sources i.e. APM (gas sold through administered pricing mechanism) gas. GoI will allocate additional APM gas for meeting additional needed," Vashisth said.  End

 

Edited by Avishek Dutta

 

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