Fitch sees risks to India's target of raising natural gas' energy share

Price volatility and infrastructure constraints will challenge India's target of increasing the share of natural gas in its primary energy to 15 per cent by 2030 from 6 per cent in 2017, Fitch Ratings said in a new report Tuesday.

"Progress on the target has been minimal - 6 per cent share in 2021 - as natural gas growth has not managed to outpace total energy growth," it said.

This is despite resilient demand from city gas distribution (CGD) networks and rising domestic production.

Prime Minister Narendra Modi had in 2017 set a target of raising the share of natural gas in the primary energy consumption basket with a view to cutting down emissions.

 

However, the demand for the fuel is rising at a slower rate, with current growth rates only around 53 per cent of levels required for the country to meet a 15 per cent gas use target. Gas demand by 2030 will only reach 326 million standard cubic meters per day at current 4-5 per cent growth rates, much lower than the 611 mmscmd of consumption needed to meet the 15 per cent energy mix goal.

"We believe that natural gas demand from price-sensitive industrial and power sectors may be limited in times of rising prices, as they switch to cheaper alternate fuels in the absence of robust emission norms," it said. "Gas adoption for mobility and household fuel may also slow when its price benefit against alternate fuels decreases."

It saw inadequate gas pipeline network and expectation of execution delays in some under-construction projects may limit natural gas demand growth to lower than its intrinsic levels, even in times of low prices.

Underutilised existing liquefied natural gas (LNG) import infrastructure may slow new capex in the near to medium term, creating temporary bottlenecks in case demand picks up sharply.

Sustained high gas prices and customers switching to alternate fuels may squeeze developers' returns and fresh capex plans.

Still, the operationalisation of new CGD networks, the price advantage of natural gas against other fuels, and increased adoption of the fuel to comply with pollution norms would support long-term NG demand from CGDs, Fitch said.

"We also expect increasing domestic natural gas production, on the ramp-up in operations at India's complex deep-water gas fields, to support consumption in the near to medium term," it said.

A government-appointed panel has recommended changes to the domestic gas pricing formula, including the introduction of a floor and ceiling price for gas from legacy fields while continuing the existing ceiling for the price of gas from difficult fields.

"We believe that any change in the pricing formula remains subject to further government deliberations around considerations of incentivising upstream capex, curtailing inflation and minimising government subsidies while maximising returns, and promoting natural gas as a fuel," Fitch added.