CNG to underpin demand in Indian city gas sector: ICRA
Compressed natural gas (CNG) is expected to be the key driver of gas demand growth within the city gas distribution (CGD) sector in India, Varun Gogia, assistant vice president and sector head at ICRA, said during a recent webinar.
Gogia attributes this growth to the robust registration of CNG vehicles in the country. According to ICRA research, the number of monthly CNG vehicle registrations more than doubled between July 2021 and July 2023. This is due to the strong total cost of ownership advantage of CNG vehicles over other technologies.
CNG sales volumes have been showing impressive growth. CGD companies sold 19.4mn m3/day of CNG during the October 2022 to March 2023 period, up 51% from October 2020 to March 2021 period, Indian oil and gas ministry data showed. India at present has 5,899 CNG stations.
“CNG continues to have an advantage over petrol and diesel vehicles. This has resulted in a rise in demand for CNG vehicles,” Gogia said.
CGD sector in India has four distinct segments: CNG predominantly used as auto-fuel, and piped natural gas (PNG) used in domestic, commercial and industrial segments.
ICRA expects that favourable gas allocation policy will support the CGD sector’s competitiveness. The implementation of Kirit Parikh committee recommendations has reduced regulated gas prices thus improving the competitiveness of the sector.
The Indian government in April this year revised the pricing guidelines for locally produced gas. The government's decision is based on the recommendations of an expert panel chaired by economist Kirit Parikh, which submitted its report in November last year.
As per the new formula, the price of the gas produced domestically will be 10% of the monthly average of the Indian crude basket and notified on a monthly basis. The gas price will, however, have a floor of $4/mn Btu and a cap of $6.5/mn Btu. Gas produced from new wells of state-owned explorers ONGC and Oil India would be allowed a premium of 20% over the administered price.
Indian gas consumption to grow 6-7%
ICRA estimates that gas consumption in India is expected to grow by 6-7% year/year in fiscal year than ends on March 31, 2024 (FY2024) over a low base, supported by softer LNG prices and an uptick in the domestic gas production. Indian total gas consumption in FY2023 was almost 60bn m3.
“The fertiliser sector will continue to remain the largest consumer, supported by ramp-up of new fertiliser plants that were commissioned in H2 FY2023. The demand from the CGD sector is underpinned by the CNG segment, which remains robust owing to the strong economic advantage over alternate fuels, a testament of which is the strong uptick in CNG vehicle sales in the last couple of years,” said Sabyasachi Majumdar, senior vice president and group head, corporate ratings, ICRA.
Global LNG markets stabilising
ICRA believes that global LNG markets are stabilising in 2023 after lifetime high prices last year. LNG prices moderated in 2023 aided by changes in demand patterns across the key consuming nations.
The LNG demand from China has been subdued amid an economic slowdown, rising pipeline flows from Russia, and increasing use of coal. The EU demand stabilised after the initial peak, owing to mild winters, austerity measures, and a weak economic environment, ICRA said.
The demand from Japan and South Korea was also tepid owing to their increased focus on the use of renewables and nuclear power. On the other hand, the US domestic demand has also witnessed subdued growth, and with healthy gas inventory levels, the Henry Hub prices have moderated, ICRA added.
“Soft LNG prices bode well for the Indian gas consumers. However, event risks persist, like an extended labour strike in Australian LNG facilities and a colder-than-expected winter in the northern hemisphere, which could result in volatility in the spot prices,” Majumdar said.
“Given the lack of investments in the LNG projects over the past few years, incremental availability of LNG will be capped with major capacity additions expected in FY2025-26. Meanwhile, structural changes are underway on the demand front, such as the increasing focus of the EU on renewable energy, a shift towards coal usage by China, and increasing reliance on nuclear power by Japan and South Korea. The LNG offtake by South Asian countries remains highly price sensitive,” he added.