Reforms, infra investment critical to unlocking India’s next phase of gas demand growth: Report

India’s long-term natural gas growth will depend not only on expanding LNG import capacity but also on accelerating investment in transmission and distribution infrastructure, gas-intensive industries, and reforms to market design, regulation and pricing, according to a new report of the International Gas Union (IGU).

While India has significantly expanded regasification terminal capacity, the pace of investment in midstream infrastructure has lagged, limiting the country’s ability to increase gas consumption. The report argues that reforms to pricing mechanisms and market access will be essential to support sustained growth in gas demand.

“The Strait of Hormuz crisis has underlined several import dependencies for India, particularly in gas supply chains. India’s heavy reliance on Gulf-sourced LPGs and LNG, where Qatari exports are the primary source of supply, will bring into question India’s historic reliance on close geographical suppliers that have proven to be vulnerable to disruption.

“These issues are not insignificant, and the current price shock will also, in the short term, upend the economics of imported gas for Indian power producers, industrial and domestic customers, for as long as it lasts,” it said. India remains heavily dependent on imports to meet its natural gas and LPG requirements. Domestic gas output meets around 50-52 per cent of the country’s demand, with the balance met through imports of liquefied natural gas (LNG), primarily from Qatar, Australia, the US and Russia.

The dependence is even more pronounced in liquefied petroleum gas (LPG). India imports around 60-65 per cent of its LPG requirement despite being one of the world’s largest LPG consumers. Much of these imports transit from Strait of Hormuz. During the recent Iran war, energy transit through the strait was disrupted, exposing India’s vulnerability. IGU said over the longer term, however, the outlook could improve if the Gulf crisis eases. A wave of new LNG export capacity expected to come online through the remainder of the decade is likely to leave global LNG markets well supplied, putting downward pressure on prices and improving the economics of gas consumption in India. Permanent demand destruction elsewhere in Asia following the recent price shock could further accelerate declines in Asian benchmark LNG prices, making greater gas deployment more attractive.

To capitalize on lower global prices, the report says India will need to enable buyers to respond more effectively to short-term LNG price opportunities. That would require further liberalisation of LNG terminal capacity bookings and system entry charges, improving access for buyers and helping address historically low utilisation rates at import terminals. The report also argues that gas will struggle to compete with coal unless transmission infrastructure expands significantly.

“If gas is going to compete more effectively with coal, new transmission lines - underpinned by competitive transport tariffs - will be needed to provide reliable supply to the north, east and centre of the country where the gas network exists but is sparse,” it said, adding in many coal-dominated regions, insufficient pipeline utilisation has kept delivered gas costs high and discouraged new customers.

“Progress will require reforms to market design, regulation and pricing, as well as further liberalisation of terminal capacity bookings and system entry charges,” it said.

The report said lower wholesale gas prices alone will not be sufficient to drive higher gas consumption. Greater investment in infrastructure, commercial contracting and broader market reforms will also be needed to increase the role of gas in India’s energy mix.

It argues that meaningful investment is unlikely without fundamental reform of wholesale gas pricing. India’s pricing framework has undergone multiple changes over the past decade, shifting from a heavily regulated system to hub-linked pricing in 2015 before being revised again in 2022 to link domestic prices to oil. While the latest mechanism moderated prices after the global energy shock, domestic gas prices have remained above USD 7 per million British thermal units even as the earlier hub-linked formula would have resulted in lower prices, the analysis notes.

Although the Gulf crisis has raised questions about LNG’s reliability as an import source, the report says some of those risks can be mitigated through a more diversified import portfolio.

Any resolution of shipping disruptions through the Strait of Hormuz is also expected to trigger a rapid correction in gas prices. Combined with weaker demand elsewhere in Asia, lower LNG prices could create an opportunity for India to accelerate gas adoption, provided domestic infrastructure bottlenecks and market constraints are addressed, it added.