The Future of Gas in India
The natural gas sector in India today is at the threshold of rapid growth on the back of an increasing demand, increased exploration, large scale discoveries in the East Coast, build-up of LNG import terminals in the West Coast, new upcoming LNG import terminals and the development of a nationwide natural gas pipeline grid. Today, we have LNG import terminals with a capacity of 30 mtpa. In the next 5 years, an additional 25 mtpa is likely to be installed to cater to 200 mmscmd of LNG supply. We need to more than double this capacity by 2030 to meet the balance demand.
The International Energy Agency (IEA) expects India’ natural gas consumption to grow by 25 billion cubic metres (bcm), registering an average annual growth of 9 percent until 2024. Industrial consumers are expected to account for 40 percent of net demand growth. The demand is also expected to be driven by other sectors such as transport, residential and energy. Transport and mobility sector, which comprises distinct modes such as railways, road, inland waterways, air and marine transport systems, had been the fastest-growing end-use system of energy. The sector is heavily dependent on petroleum fuels and contributes to half of India’s oil and gas demand and 10 percent of its CHG emissions. In 2020, an estimated 60 percent of the country’s energy consumption in transport arose from passenger transport and 40 percent from freight transport.
An expanding economy, rapid urbanisation, and a growing population are fundamental drivers of India’s energy demand, pushing the nation to become one of the most significant energy markets by 2040 (PIB 2019). However, India’s primary energy mix remains coal-dominated, which has been an impediment to the deep decarbonisation objectives of the country. The government has already recognised this issue and has adopted a multipronged approach to promote diversification of the primary energy mix with fewer carbon-emitting energy sources (IEA 2020). Indeed, India aims to become a natural gas-based economy by increasing its share to 15 percent of the primary energy mix by 2030 (PIB 2020). But the share of natural gas in India’s energy basket has been increasing at a much slower rate than anticipated, from 5.6 per cent in 2012–13 (MOSPI 2014) to 6.5 percent in 2018–19 (MOSPI 2020), despite a 6 per cent increase in its consumption during the same period (PPAC 2020).
However, the market for natural gas currently lacks depth with only a small number of producers (production still largely controlled by the state players), negligible number of shippers and a fairly limited number of consumers. Therefore, the market is limited in terms of bilateral contracts between producers/marketers and consumers of natural gas. The recently-established gas spot market suffers from a lack of liquidity as well as a lack of transparency due to a very limited number of players.
The unbundling of natural gas transportation and marketing is still to happen. However, it is envisaged that in the long run, with the maturing of gas market, the authorized entities will have transportation of natural gas as their sole business activity and will not have any business interests in the gas marketing or city or local gas distribution networks. PNGRB has already come out with draft regulations to ensure legal/ownership unbundling of transportation activity from other activities of an entity. Even before the unbundling is affected, PNGRB needs to ensure that the capacity in transportation pipelines is available on a transparent basis to all the shippers and consumers.
The gas allocation policy classifies consumer sectors in two tiers. Tier one includes priority sectors such as the city gas distribution (CGD) sector for piped natural gas (PNG, domestic) and compressed natural gas (CNG, transport), fertiliser, power, LPG, etc. which receive the larger share of cheaper domestic gas. In contrast, tier two sectors have to rely on expensive LNG. The prioritisation is based on either the price-sensitive nature of consumers or because this fuel has been recommended as a solution to a long-term problem. For instance, fertiliser production is a priority considering the sensitivity of the agriculture sector, whereas the CGD sector is included as a consequence of a Supreme Court ruling to curb increasing air pollution in cities.
The natural gas pricing is moving towards a market determined pricing mechanism and Indian gas market is getting increasingly aligned with the global trends. Although this gets restrictive when volumes for gas produced locally gets allocated by the government which impedes the development of a gas market and deters imports as it limits the demand for LNG.
Equally important is the condition of sectors consuming gas like power and fertilizers which form the anchor load for any gas field or LNG terminal. The affordability of these two key user segments depends upon the policy directives and regulatory reforms in these sectors. The reform in the power sector has moved at a very slow pace which is burdened even today with high AT&C losses, tariffs charged which are not cost reflective and mounting losses to the State Electricity Boards (SEB’s) which are not bankable to sign power purchase agreements with power producers. In the Fertilizer sector the end product is subsidized with the government deciding the end price; thus limits the cost at which raw material like natural gas can be bought. Unless key reforms are not initiated in these two sectors it would keep
affecting the development of the gas sector since the price signals will always be distorted.
