Indian gas demand to soar but challenges ahead: IEA

India's LNG imports could quadruple to more than 120bn m³ in 2040 from around 30bn m³ in 2019 based on current policies, outstripping growth in domestic gas production, the IEA said in its India Energy Outlook 2021 report.

Gas consumption in India increases by an average of 7pc/yr to 131bn m³ in 2030 from 63bn m³ in 2019 — and then surges to 201bn m³ by 2040 — under the IEA's Stated Policies Scenario, which takes into account current policy settings and assumes Covid-19 is largely brought under control this year.

Import dependency roses to 69pc of demand by 2040 from 50pc in 2019 under this scenario. But the share of gas in India's energy mix reaches just 12pc in 2040, falling short of the 15pc share by 2030 that the Indian government is targeting.

India's ambition to establish a gas-based economy is well-aligned with international market conditions but will require significant investment and policy support to overcome infrastructure bottlenecks and pricing constraints, the IEA said.

Demand drivers

Industrial gas demand — including the use of gas as a feedstock for petrochemical and fertilizer production — is the primary source of demand growth in the Stated Policies Scenario.

Recent policy moves, including a wide‐scale rollout of compressed natural gas (CNG) and the expansion of gas infrastructure including LNG terminals, long‐distance transmission pipelines and city gas distribution networks, will help drive 30bn m³ of gas demand growth over the next decade through fuel switching away from coal and oil. A recent switch to CNG from coal in India's brick industry is encouraging greater gas use, the IEA said.

India's gas import costs rise from $12bn/yr to $43bn/yr over 2019-40, but this remains significantly lower than the country's $250bn/yr oil import bill in 2040, helping incentivise India to shift towards natural gas.

Challenges ahead

But the path toward a "gas‐based economy" may be complicated by consumers' price sensitivity, especially given the complex patchwork of additional charges and tariffs that turned the average wholesale gas cost of $6/mn Btu in 2019 into an estimated consumer price of $12/mn Btu, the IEA said.

There is an affordability gap between natural gas and competing fuels in several sectors, although a small subset of consumers benefit from access to lower-cost domestic gas, it added. And competition from cheap solar power could also mean natural gas will end up playing a secondary rather than central role in India's electricity sector.

High tariffs that have pushed the power sector away from natural gas, and constraints from cash-strapped distribution, mean gas demand from the electricity sector is expected to rise by just 10pc by 2040.

The lack of a vibrant upstream sector may also stymie moves towards a gas‐based economy. Domestic gas prices are not adequate to trigger larger upstream investment, especially at a time when company finances are under strain from the Covid-19 pandemic and there is ample availability of international LNG, the IEA warned.

The IEA expects domestic natural gas production to gradually pick up as domestic prices rise and more investments pour in, sending output to 78bn m³ by 2040 from 32bn m³ in 2019 .

By Subethira Ahrumugam