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The Indian energy market witnessed a significant shift on October 18, 2024, as shares of city gas distribution (CGD) giants Indraprastha Gas Limited (IGL) and Mahanagar Gas Limited (MGL) plummeted by as much as 15%. This dramatic decline was triggered by the Indian government's announcement of revised gas allocation guidelines, prioritizing essential sectors over CGD companies.
The new policy, introduced by the Ministry of Petroleum and Natural Gas, mandates that domestically produced Administered Price Mechanism (APM) natural gas be primarily allocated to essential sectors, including domestic PNG and CNG for transportation. This means that CGD entities like IGL and MGL will only receive gas based on the quantities assigned to GAIL (India) Limited for these priority areas. This policy shift has significant implications for the companies' profitability.
MGL, in a stock exchange filing, revealed that its allocation for CNG (transport) has been slashed by approximately 20% effective October 16, 2024, compared to the previous quarterly average. This substantial reduction is expected to severely impact the company's financial performance. To mitigate the effects of this allocation cut, MGL is actively exploring alternative gas sourcing options, including domestically produced High-Pressure High Temperature (HPHT) gas, New Well/Well Intervention gas (NWG) from ONGC, and benchmark-linked long-term gas contracts.
Similarly, IGL has also received notice from GAIL (India) Ltd. regarding a significant reduction in its domestic gas allocation, effective from October 16, 2024. The revised allocation represents a 21% decrease from previous levels, raising significant concerns about the company's future profitability. IGL, like MGL, is also actively seeking alternative gas sources to offset the impact of the reduced allocation.
The government's revised gas allocation policy, aimed at ensuring gas availability for essential sectors, has had an immediate and noticeable impact on the stock market. While the policy aims to secure vital gas supplies for domestic and transportation needs, it has created a challenging environment for CGD companies like IGL and MGL. The companies are now faced with the task of navigating this new landscape, securing alternative gas sources, and adapting their business models to ensure continued profitability in a market where gas allocation has become more competitive.