Fitch Ratings: Price volatility, infra constraints challenge India's target of expanding natural gas' energy share

"Progress on the target has been minimal – 6 percent share in 2021 – as natural gas growth has not managed to outpace total energy growth," the report released by the ratings agency stated.

"India’s natural gas share of the energy mix has stayed at 6 percent the past seven years, well below the global average of 24 percent, and dominated
by coal (57 percent of total) because of large domestic coal reserves," it added.

Price volatility is expected to limit the demand for natural gas from price-sensitive industrial and power sectors, the report suggested, adding that they may also switch to cheaper alternate fuels in the "absence of robust emission norms".

Gas adoption for mobility and household fuel may also slow when "its price benefit against alternate fuels decreases", it pointed out.

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Deficient infrastructure

"India’s inadequate gas pipeline network and our 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 natural gas prices," Fitch said.

The ratings agency added that "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 natural gas prices and customers switching to alternate fuels may squeeze developers’ returns and fresh capex plans, it added.

Fitch, however, suggested that the demand from city gas distribution has been resilient, and is expected to grow with the penetration of the distribution network in new geographical areas.

"We believe that the operationalisation of new city gas distribution
geographical areas, the price advantage of natural gas against
other fuels and increased adoption of natural gas to comply with pollution
norms would support long-term natural gas demand from CGD companies," it said.

Local production to rise

Fitch said that it expects an increase in domestic natural gas production  "on the ramp-up in operations at India’s complex deep-water natural gas fields". This jump in production will also support consumption in the near to medium term, it added.

But the report also pointed out that on the supply side, India’s natural gas import dependence "increased from 28 percent in FY12 to 54 percent in FY21 amid benign LNG prices".

However, the share of imports has fallen in this fiscal, "reaching 45 percent in 8MFY23, as LNG became more expensive and domestic production started rising", it added.