Gas production is expected to increase substantially over the next few years from 79 mmscmd in FY2021 and 93 mmscmd in FY2022 to 123 mmscmd in FY2024, primarily due to ramp up in the production from KG Basin blocks of RIL-BP and ONGC

The domestic consumption of gas grew at a CAGR of 3.7% from 130.7 mmscmd in FY2016 to 154.1 mmscmd in FY2020 though there was a slight dip in consumption in FY2021, owing to the impact of the Covid-19 pandemic. However, domestic production has not kept pace with the growing consumption leading to increasing dependence on imported LNG, the share of which in the total gas consumption rose from 41% in FY2016 to 52% in FY2020.

Gas production is expected to increase substantially over the next few years from 79 mmscmd in FY2021 and 93 mmscmd in FY2022 to 123 mmscmd in FY2024, primarily due to ramp up in the production from KG Basin blocks of RIL-BP and ONGC.

The domestic gas consumption is expected to grow by 9% in FY2023 to 181 mmscmd and 4% in FY2024 to 188.4 mmscmd. Though the share of LNG in the total gas consumption would reduce over the medium term, nevertheless the dependence remains high.

To incentivise higher production of domestic gas, the Government of India has provided marketing and pricing freedom for coal bed methane producers. The government has also provided marketing and pricing freedom (subject to a price ceiling) to players operating in deep water, ultra-deep water, and high pressure-high temperature areas, that were yet to commence commercial production as on January 1, 2016. Accordingly, most new gas fields being brought to production have marketing and pricing freedom. Recent price discoveries for RIL and Vedanta’s gas have been in the range of US $19-24/mmbtu.

Historically, gas has traded at a discount to crude on an energy equivalent basis. However, since the middle of 2021, gas prices decoupled from that correlation and have traded at massive premiums to crude. This is on account of the shift to gas by several large economies to replace dirtier fuels like coal or nuclear power over the last several years. The catalysts for the sharp run-up in prices were low inventories in Europe and Asia, odd weather patterns requiring higher heating/cooling, weak generation by renew[1]able sources such as wind, weak hydroelectric power generation due to droughts and planned and unplanned outages at several plants.

Nevertheless, the larger issue is that there could be a structural shortage of LNG capacity, given the net zero commitments that different governments are making and under investments by global upstream companies due to environmental, social and governance (ESG) goals. Accordingly, gas is expected to continue to trade at a premium to crude going forward and there are limited prospects for softening of the market in CY2022.

Domestic gas prices have been notified at US $6.1/mmbtu for H1 FY2023 and have more than doubled from the gas price of US $2.9/mmbtu for H2 FY2022. The increase follows the run-up in gas prices at various international hubs. This price rise is likely to increase the government of India's fertiliser subsidy by Rs. 6,800 - 7,500 crore for FY2023. For US $1/mmbtu increase in domestic gas prices, assuming that the CGD (City Gas Distribution) players maintain their current absolute contribution margins in Rs.kg and Rs/scm terms, the CGD players could increase CNG price and PNG (domestic) prices by Rs. 4.5-4.7/kg and Rs. 2.5-2.7/scm respectively in Delhi. However, the price revision should have limited impact on the sector’s competitiveness, since the benefit for end consumers from conversion economics perspective remains intact due to increase in prices of alternative fuels. Given the continued high prices at international hubs, prices of domestic gas are expected to be revised upwards in the subsequent revision as well.

The Government of India has pushed for setting up of trunk pipelines connecting the East and North-East through budgetary support in the form of viability gap funding for Urja Ganga and Indradhanush pipelines.

Apart from this, the Petroleum and Natural Gas Regulatory Board (PNGRB) conducted bidding rounds from between 9 - 11th April 2018 to September 2021, wherein CGD licences were given to enable increase in coverage from 20% of the population of the country till round 8 to 95% by round 11. Accordingly, large parts of the country will for the first time get an option to use gas. Millions of new consumers are expected to be added over the next few years, using natural gas as auto and cooking fuel, thereby boosting demand for gas.

 There are several LNG terminals that are being set up including at Jaigarh, Charra, Dhamra etc. along with recently commissioned terminals at Mundra and Ennore, which would increase competition in the market and allow greater choice to consumers. The LNG terminal capacity would increase from 37.5 million metric tonnes per annum as on FY2022 end to 66.5 MMTPA as on end-FY2025. New terminals would also increase options for using LNG directly as a fuel for commercial vehicles. The terminals being set up on the East Coast would also improve economics for using gas for consumers on the East as historically terminals have been concentrated on the West.

The high prices of spot and term LNG have led to a decline in the capacity utilisations of all LNG terminals. New LNG terminals may take longer to scale up volumes and accordingly their returns could be impacted.

Marketing margins for gas marketers would be compressed or spot and short-term gas sales but are expected to widen for Henry Hub-linked gas. The volumes for gas pipeline operators would be dampened as the industry switches to liquid fuel wherever possible, owing to higher prices of gas vis-a-vis liquid fuels on an energy equivalent basis.

As domestic gas prices are expected to rise substantially in the next revision, the CGD entities may have to pass on the price increases in a graded manner, leading to some lag in full pass-through of costs and accordingly put pressure on margins. Relatively higher spot LNG & term LNG prices will have a negative impact on CGD companies as margins on industrial and commercial sales are likely to be impacted. High gas prices would also deter conversions.

The Government of India is pushing for use of LNG as a fuel for commercial vehicles following the example of countries like China, where lakhs of LNG driven vehicles are in use. LNG is preferred over HSD for commercial vehicles owing to better economics and lower total cost of ownership. The use of

LNG is preferred for large and medium commercial vehicles vis-à-vis CNG primarily because of two factors: Much larger re-fuelling distance and higher injection pressure allowed by LNG, which is better for engine life Currently, CNG enjoys a huge advantage over alternate fuels like petrol and diesel owing to the use of low-priced domestic gas for the same and lower taxation by the centre and the state governments. However, as CNG gains popularity, the centre and the state governments may see the fuel as a lucrative source of revenue and increase taxes, denting its competitiveness.

Some of the key issues hindering the development of the gas sector in the country include lack of pipeline connectivity across the country, especially in the eastern and south[1]ern parts, regulated realisations/product prices of natural gas consuming industries, lack of appropriate pipeline tariff regime, absence of uniform taxation with various states having different VAT rates, separation of pipeline ownership and marketing, slow pace of approvals etc. Despite recommendations by the PNGRB, the states are yet to provide a regulatory push such as lower road tax on CNG/LNG vehicles, single window clearance for approvals, etc.

The project execution activities in the sector have also been adversely impacted by the delays and disruptions caused by the COVID-19 pandemic, shortage of skilled manpower, overbooked contractors and suppliers and activism by farmers against laying of gas pipelines. Additionally, competition from electric vehicles, especially for the state transport bus segment and hydrogen, would also increase going forward.