India's bet on gas-based economy runs into Ukraine war challenges

As the Ukraine-Russia conflict pushes up prices and Europe outbids South Asia for scarce supplies, billions of dollars in domestic gas infrastructure investment are at risk

Last week, Petroleum Minister Hardeep Puri dedicated 166 Compressed Natural Gas (CNG) stations spread across India. “In 2014 the country had only about 900 CNG stations. Today we have 4,500 CNG stations with plans to take this number to 8,000 in the next two years. The number of PNG (piped natural gas) connections has also crossed 95 lakh compared to about 24 lakh in 2014,” Puri said.

What was left unsaid, and perhaps unaccounted for, were the consequences of an armed conflict raging 5,000 kilometres away, and its impact on the price of gas for a Mumbai CNG taxi wallah. After Mahanagar Gas increased rates by 5 per cent, at Rs 80 per kg, CNG is getting perilously close to diesel, an alternate and more polluting fuel.

The consequences of Russia’s invasion of Ukraine on fuel prices, especially gas, threaten to linger until 2026 as Europe outbids poorer South Asian nations for scarce liquefied natural gas (LNG), industry experts say. That puts India in a hard place as far as energy security goes because we import half of our needs in the form of super chilled methane molecules. That dependency will only increase in line with demand. At risk, at least in the short term, are billions of dollars in investments in gas infrastructure, threatening to undermine economic growth and employment.

“It’s not easy for new players to come and sell LNG in the present scenario,” said Venkateshwar Prasad Sinha, an LNG consultant and former chief general manager, LNG, with state-owned Indian Oil Corporation. “Industries are switching to cheaper alternatives.”

When India embarked on a gas-fuelled future in 2015 — a throwback to Prime Minister Narendra Modi’s Gujarat model where gas was a driver of development — Asian spot LNG rates traded above $5 per million British thermal units (Btu). CNG in Mumbai costs Rs 42 per kg.

Rates have jumped 13-fold in the last seven years to around $65 per million Btu, a record, in early March, not long after Russia entered Ukraine in February, according to the Paris-based International Energy Agency (IEA). The Argus assessment for spot LNG prices for deliveries to northeast Asia was around $43 per million Btu deliveries in August.

“Russia’s invasion of Ukraine has exacerbated the tightening supply of natural gas underway since mid-2021, pushing up prices for consumers and leading to fuel switching and demand destruction,” the IEA said, adding, “It casts longer-term uncertainty on market prospects for gas, especially in developing markets where it was to play a central role in energy transitions.”

India was one of the key countries where gas was supposed to play a major role in the journey from coal and oil to renewables. New Delhi proposed to increase the role of gas in India’s energy mix to 15 per cent — close to a quarter for Gujarat — from 6 per cent. But unlike oil, which can be transported easily, gas requires dedicated pipelines, refrigerated trucks and tankers and import terminals to deliver to kitchens, and fuel tanks across the country.

That required $60 billion in spending on terminals, transmission lines and city gas networks. To put that in perspective, the Modi government in just about a decade — despite the Covid-19 pandemic — will boost coverage of the fuel to most Indians, and cover much of the country’s area from less than 20 per cent levels of population penetration and less than 10 per cent area covered in 2014.

All that effort in building a gas economy for a price-sensitive India may come unstuck because of the conflict. “Spot LNG prices were high even last year due to Covid-19 but we expected them to drop after this winter,” an official with state-run Petronet LNG, India’s biggest LNG importer, said. But the war in Ukraine has changed all calculations, leading to uncertainty, he added.

Demand for LNG in India is expected to bounce back 15-17 per cent in fiscal 2023 after a 3.4 per cent decline in fuel use last fiscal, ratings agency Crisil said in February. The estimate was more in line with an 18 per cent growth in LNG imports at 25.6 million tonnes in the pre-Covid 2019-20 fiscal from a year earlier, according to the oil ministry. LNG prices averaged $7.1 per million Btu in 2019-20 from $9 per million Btu a year earlier, pushing purchases higher. Today, spot LNG costs nearly six times compared to average 2019-20 levels. Typically, Indian consumers can afford $8-18 per million Btu, a Petronet LNG official said.

Crisil now expects LNG imports this fiscal to grow just 1-3 per cent to 25-27 million tonnes. “In fiscal 2023, we expect surging prices of LNG in the global market, owing to geopolitical tensions as well as low inventory levels, to put pressure on the growth of LNG imports,” said Hetal Gandhi, director, Crisil Research. Rating agency ICRA’s Vice-President Prashant Vashisht pegs growth in LNG imports at 3 per cent this fiscal from a year earlier.

Miserly LNG import growth rates will hurt usage of existing and upcoming LNG facilities. Indian companies expect to more than double LNG import capacity in the next five years from 42.5 million tonnes a year now. Adani, Total, Petronet, Swan Energy, H-Energy and HPCL among others plan to add 49 million tonnes a year of capacity, but Crisil expects only 32-35 million tonnes to come up by 2027 because of low usage rates. ICRA forecasts 26 million tonnes to be added by March 2025.

“Utilisation levels are expected to be depressed due to new capacity additions and high gas prices,” Vashisht said. Overall utilisation of the installed LNG capacity was 59 per cent last fiscal, and expected to drop to less than half if all the plants come up, industry officials said.

India is shielded from higher LNG prices because most of its imported volumes from Qatar and the US are under long-term contracts. Prices range from $12 to $14 per million Btu for Petronet LNG’s Qatari supplies, a third of spot levels. But those contracts expire in a few years, and Indian companies are yet to finalise new ones, unlike the Chinese who snapped up 10-year contracts at competitive rates last year. Now, Petronet and Adani must compete with Europe for Qatari and American supplies.

At some point, rising rates of gas may force the Modi government’s hand in directly controlling retail prices, as seen in the case of road fuels and LPG, hurting reforms. City gas and fertilisers, the biggest drivers of gas use, are subsidised but there are limits to how much New Delhi can pony up funds from an already tight treasury, which eventually end up in the pockets of foreign gas suppliers.