Price pressures deflate gas use equations, put $2 trn investments at risk

City gas consumption is expected to anchor Prime Minister Narendra Modi’s vision of more than doubling the share of natural gas in India’s energy mix by 2030. But the strands that bind consumption of the fuel to kitchens, vehicles and industries from Rameshwaram to Kashmir are so tenuous that the slightest jump in international gas prices, coupled with stagnation in domestic production, is sufficient to fray demand.

City gas distribution (CGD) utilities were among the first to feel the impact of rising fuel prices on demand last year after customers deserted them for alternative fuels. CNG users in Delhi and Mumbai started switching to petrol, while industries, chemical plants and refineries switched to liquefied petroleum gas (LPG), which is mainly propane and butane in liquid form, and liquid fuels, which were cheaper compared to less-polluting natural gas and gas produced from processing crude oil.

Demand for city gas declined 0.8 per cent in FY23 to 12 billion cubic metres from a year earlier because customers could not afford the steep spike in gas prices, whether domestic or in the form of imported liquefied natural gas (LNG). The price advantage of compressed natural gas (CNG) over diesel and petrol halved to 25 per cent last financial year, compared to FY21 and FY22. At the same time, the competitiveness of piped gas against LPG cylinders for the domestic segment was reduced to 1-3 per cent, according to CRISIL Research.

Until then, the CGD segment had been growing steadily at 10 per cent a year between 2019 and 2022. The exodus from city gas, which accounted for 20 per cent of all gas use and 12 per cent of total LNG use last fiscal, has continued this year, even though imported LNG prices dropped more than 80 per cent from last year’s record highs – from $70 per million British thermal units (Btu), the consequence of Russia’s invasion of Ukraine, to $10-$12 per million Btu.

But city gas utilities are still stumbling, even after New Delhi, on concerted lobbying by these companies, slashed prices of domestic gas by around 25 per cent to $6.5 per million Btu and increased the allocation of cheap domestic gas for CGD players. 

State-run Indraprastha Gas, the country’s biggest CNG player, saw a 6 per cent decline in volumes by industry and commercial users in the April-June quarter from the previous quarter as consumers switched to naphtha, fuel oil or LPG, given favourable pricing, Nomura said in a report.

Realising the risk to over Rs. 2 trillion in ongoing investments in gas transportation and city gas infrastructure, the Modi government abandoned gas price reforms to embrace a price cap, and changed the pricing formula to calculate domestic gas prices from a cocktail of international gas benchmark indices to a percentage of the crude oil price. It also diverted scarce gas available under administered prices (known as APM gas) from fertiliser plants to city gas utilities.

Thanks to government largesse, city gas used 2.5 billion cubic metres (Bcm) of domestic gas in the April-June quarter and just 703 million cubic metres of imported LNG compared to 1.9 Bcm and 1.2 Bcm, respectively, a year earlier. The use of domestic gas by fertiliser plants, meanwhile, dropped by 43 per cent during the period.

At the same time, the government raised taxes on propane, much of which is imported, to compel ceramic industries in Morbi in Gujarat, the country’s biggest gas-consuming belt, to switch to piped natural gas, said Kamlesh Trivedi, an Ahmedabad-based LNG consultant. CGD volumes had slumped last year after most units shifted to cheaper propane. Morbi, India’s biggest ceramic tile hub, accounts for nearly a quarter of the country’s city gas sales. 

Looking ahead, the natural gas market in India will be significantly influenced by government initiatives aimed at prioritising the use of natural gas to reduce emissions, said Brajesh Singh, president, Arthur D Little. Options involve imposing a carbon price or tax on burning liquid fuels to make less polluting gas affordable to end users.

New Delhi’s “band-aid” policy has certainly revived the fortunes of city gas from the depths it plumbed in the past two years. Nomura identified IGL and MGL, India’s biggest city gas companies, to be key beneficiaries of the downward revision in domestic gas prices to $6.5/MMBtu from $8.6/MMBtu, and a steep 33 per cent quarter-on-quarter decline in spot LNG prices to $10.3/MMBtu.

But the future seems rocky, especially given the potential for growth in India’s city gas demand. As the past two years have shown, the principal problem lies in the lack of <i> affordable <p> gas supplies.

CRISIL Research anticipates a substantial growth trajectory for city gas demand, with a projected compound annual growth rate of 15-20 per cent between FY23 and FY30, with volumes doubling to 85-90 million cubic metres a day from this fiscal’s projected consumption. “This growth can be attributed to factors such as urbanisation, industrial expansion, and environmental considerations,” said Hetal Gandhi, director, CRISIL Market Intelligence.

As for CNG, over the next 12 years, India plans to triple the number of stations to 17,700, and boost by 11-fold piped gas connections to 120 million households and businesses. The government has authorised 302 geographical areas covering nearly 98 per cent of the population, with the network poised to stretch to the Northeast and Kashmir. Seventy per cent of the areas were authorised in the last five years.

The pandemic and supply chain issues have delayed expansion of the network with the expected timeline for the completion of the entire CGD network by the middle of the next decade. But laws have been amended to levy penalties for delays in laying the network.

Even if infrastructure is in place, cheap, imported LNG will still be needed to power CNG’s future because domestic supplies are stagnant. There is no large domestic discovery in sight, and given the long lead times involved in developing deep water areas, India’s dependence on imported LNG will continue to rise -- current imports at 45 per cent of demand will meet just 10-15 per cent of the government’s projected demand for the fuel in 2030. That implies a growing reliance on costly imported LNG, which even at current levels costs twice the administered price of $6.50 per million Btu at which New Delhi provides local supplies.

“One key concern is the pricing outlook,” Singh said. “In such a price-sensitive market, it is crucial to maintain a reasonable gas supply price.”

The growth of CGD is now hostage to the sector’s affordability, and the availability of a shrinking pool of domestic supplies. “When we planned to develop our gas market, we expected rates of imported LNG to be $2-$5 per million Btu,” said an official from a state oil company. “Little did we expect the pandemic and the Ukraine conflict will lead to a structural upside in imported LNG rates, making them unaffordable for Indian consumers.”