The domestic consumption of gas grew at a CAGR of 3.8% from 130.7 mmscmd in FY2016 to 163.1 mmscmd in FY2022. However, dependence on imported LNG remains high at more than 40% currently. 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 the ramp up in the production from the KG Basin blocks of RIL-BP and ONGC. Domestic gas consumption is expected to grow by 6% in FY2024 to 168 mmscmd. The share of LNG in the total gas consumption would remain high as the prospectivity of the Indian sub-continent remains poor vis-à-vis oil and gas production.

However, over the longer term the following factors would impact the demand and consumption of gas:

Declining cost of renewable power: Declining cost of renewable energy has already tilted the production of power in its favour. Additionally, India is geographically suited for renewable power generation and the cost of renewable power is among the lowest in the world. Additionally, costs are declining for batteries and green hydrogen, and these are expected to reduce substantially by the end of the current decade, with increasing adoption.

Costlier gas: Historically, gas has traded at a discount to crude on an energy equivalent basis globally. However, since the middle of 2021, gas prices have traded at a premium to crude in most parts of the world. With higher gas consumption there could be a structural shortage of gas and accordingly, gas may continue to trade at a premium to crude, going forward.

ESG goals and climate commitments: Globally there is an increasing focus on the need to slow global warming and accordingly, while several countries are moving from dirtier fuels like coal and fuel oil to gas, the goal is to cut down all fossil fuel consumption drastically. The share of fossil fuels as a primary energy source may fall from 80% in 2019 to about half that proportion by 2050.

Energy security: Most countries want to bolster their energy security by reducing their dependency on imported energy. Accordingly, countries are increasingly focusing on more domestically-produced energy – much of which is likely to come from renewables and other non-fossil energy sources.

Declining investment in the upstream sector: The capital spending by oil majors declined and is likely to remain muted owing to: Increased focus on strengthening balance sheets and increasing shareholder returns; Uncertainty of oil prices in the long term; Transition towards lower carbon emissions; and ESG goals.

Green hydrogen: The cost of green hydrogen is likely to decline to that of grey hydrogen i.e. $1- 2.5/kg by 2030. As costs of green hydrogen decline, natural gas will be increasingly replaced by green hydrogen to cut greenhouse gas emissions.

Considering the above, the gas sector in the country is set to evolve with some of the key trends as below:

Growth in consumption: Gas consumption in the country is set to increase owing to the expanding city gas distribution network and growth in industrial demand. ICRA projects domestic consumption to increase to ~270 mmscmd in 2047. Growth in gas consumption would slow down from early and mid-2030s onwards as batteries become cheaper and the on-road population of electric vehicles increases.

Among the dominant consuming sectors, the trends are expected to be as follows:

Fertiliser: In the past years several new plants for urea production have been set up. Apart from these the government of India is pushing the use of nano urea, which has the potential of reducing the consumption of conventional urea. Accordingly, the demand for incremental gas for fertiliser production would be low till the end of 2030. Beyond 2030 any new fertiliser plants are likely to be based on green hydrogen/ammonia.

Power: Owing to low and declining cost of renewables, natural gas-based power generation has been declining for several years, so incremental demand would be nil. However, post 2030 green hydrogen-based power generation may be incentivised by the government for round-the-clock demand for renewable power and would be used for power storage.

City Gas Distribution: Expansion in pipeline and city gas distribution network throughout the country and healthy conversion economics would lead to growth in gas demand. However, as batteries become cheaper by the end of this decade, growth of electric vehicles is expected to pick up, leading to demand for transportation slowing down. Additionally, natural gas spiked with green hydrogen is likely to be increasingly adopted by various entities as green hydrogen becomes cheaper.

Green hydrogen consumption: Green hydrogen consumption is expected to increase with declining costs and to help reduce greenhouse gas emissions. For transmission of hydrogen the existing natural gas pipeline network may be repurposed, and a new dedicated pipeline network would be planned. Green hydrogen is likely to be used to decarbonise sectors such as steel, shipping, and aviation. Hydrogen consumption is expected to increase to about 25 MT per annum by 2050 from about 6 MT per annum currently. The National Green Hydrogen mission of the GoI with an outlay of Rs. 19,744 crore, aims to make India a global hub for production, usage and export of Green Hydrogen and its derivatives. This will lead to significant decarbonisation of the economy, reduce dependence on fossil fuel imports, provide greater energy security, and enable India to assume technology and market leadership in Green Hydrogen.

Increasing consumption of bio-gas: The SATAT initiative was launched on October 1, 2018 with the target of developing 5000 Compressed Bio Gas (CBG) plants in India at a cost of Rs. 1.75 lakh crore by 2023-24, thereby producing 15 MMTPA of CBG. However, as of now, less than 1% of that target has been achieved. However, the GoI announced several measures, including setting up of 500 new ‘waste-to-wealth’ plants to be set up under the GOBARdhan scheme at a total investment of Rs 10,000 crore and 5% CBG mandate will be introduced for all organisations marketing natural and bio-gas. Accordingly, production and consumption of CBG is likely to increase over the next decade.

The domestic gas market remains price sensitive and consumption of alternate fuels viz hydrogen etc will remain a function of the relative economics. Gas consumption in the country will be enabled by setting up of new LNG terminals and expanding the pipeline network. The GoI pushed for setting up of trunk pipelines connecting the East and the North-east through budgetary support in the form of viability gap funding for Urja Ganga and Indradhanush pipelines and the pipeline network is likely to increase from ~21000 km at present to ~33,000 km over the next few years.

While the Dhamra LNG terminal is to be commissioned soon there are several other terminals being set up in Jaigarh, Charra etc. The LNG terminal capacity would increase from 37.5 MMTPA as of now to 66.5 MMTPA as on FY2025-end. To incentivise higher production of domestic gas the GoI has provided marketing and pricing freedom for coal bed methane producers, discovered small fields and HPHT fields (subject to a price ceiling). Accordingly, most new gas fields getting into production have marketing and pricing freedom.

However, 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 southern parts, regulated realisations/product prices of natural gas consuming industries, absence of uniform taxation with various states having different VAT rates, separation of pipeline ownership and marketing, the slow pace of approvals, etc.