Another round of gas price increase?

Consumer gas prices are up for a revision come January 2020. Whether or not the revised prices are actually notified will be known very shortly. Yes, the likelihood is high, especially being under an IMF programme. But, both the IMF and the government are known to be lenient and delay price notifications, respectively, in the past. The postponement of electricity tariffs from January 2020 to July 2020 is the recent most example.

Going with the assumption that the prices do get revised indeed, consumers should brace up for another round of increase. This time around, it is likely to be much restrained unlike the previous occasion – because it will be based on a midyear review petition, and will be over and above the increase already in place since July 2019.

Before commenting on the impact it could have on domestic consumers and inflation, and commercial and industrial consumers – the merits of the petitions warrant a comment or two. The basis made for revised tariffs around the cost of gas for both the distribution companies, seem outlandish for one, and do not match for the two companies as well.

The SSGC petition assumes the rupee dollar parity for 2HFY20 at Rs165 – up 15 percent from previous determination. The average for FY20 is calculated at Rs162, which seems on the higher side. Interestingly, SNGPL does not see the rupee averaging more than 157.5 for FY20, which means the regulator will have to deliberate on which exchange rate to go with – and a middle ground cannot be entirely ruled out.

Similarly, the assumptions for crude oil and HSFO prices also have stark difference for the two companies, and are bordering on extreme bullish scenarios. For instance, SNGPL assumed HSFO at $400/ton for the entire FY20. Globally, HSFO is losing appeal and the prices have crashed and are expected to be significantly lower, especially in 2020, when new regulations take over.

In terms of crude oil, SSGC has more or less maintained its forecast for FY20 at $66 per barrel, while SNGPL has used an entirely different lens to predict crude oil price. SNGPL sees crude oil averaging at $57.5/bbl, which is significantly lower than SSGC’s assumption.  Surely, Ogra will deliberate at length while deciding on the said petitions – and it is highly unlikely that the companies will be granted the reviewed revised prices in its entirety.

In case Ogra is satisfied with the arguments and indeed decides to raise prices as per the petitions, domestic prices are all set to go up by as high as 66 percent from July 2019. In terms of CPI, the year-on-year change, as per the revised methodology, will result in an 85 percent increase in prices – which is currently calculated at 55 percent. The month-on-month change will also be a significant 20 percent.

That, although is not the truest reflection of gas price impact on consumers, as the PBS does not account for the fact that gas prices now come with benefit of previous slab. The actual impact on end consumers is significantly lower than what is currently reported, and will be reported in case of an upward revision, More on that, later.