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CEDIGAZ INSIGHTS

THE FUTURE OF NATURAL GAS IN CHINA AND INDIA CRITICAL DRIVERS AND CHALLENGES

#30NOVEMBER

2018

ARMELLE LECARPENTIER

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Evolution of EU gas supplies

LNG (net imports) Libya (pipeline) Algeria (pipeline)

Norway (pipeline) Russia Indigenous production

CCEEDDIGGGAAZZ DDDAAATAABBAAASESS

The Future of Natural Gas in China and India

CEDIGAZ, November 2018 3

TABLEOFCONTENTS

EXECUTIVESUMMARY....................................................................................................................5

1. CHINAMEDIUMANDLONGTERMNATURALGASOUTLOOK....................................7

1.1. Recent trends in the national energy mix ............................................................................. 7

1.2. Prospects for China’s energy mix .......................................................................................... 8

1.3. Prospects for China’s natural gas demand .......................................................................... 11

1.4. Prospects for China’s gas supply ......................................................................................... 14

2. INDIAMEDIUMANDLONGTERMNATURALGASOUTLOOK..................................16

2.1. Recent gas market developments ...................................................................................... 16

2.2. Prospects for India’s energy mix and the role of natural gas ............................................... 19

2.3. Prospects for India’s natural gas demand ........................................................................... 22

2.4. Prospects for India’s natural gas supply .............................................................................. 29

2.5. The expansion of infrastructure is a key enabler for natural gas expansion ........................ 31



LIST OF TABLES

TABLE 1: CEDIGAZ CHINA MEDIUM AND LONG TERM OUTLOOK – MAIN ASSUMPTIONS ............................................ 9

TABLE 2: PROSPECTS FOR CHINA’S GAS DEMAND BY SECTOR (BCM) ..................................................................... 13

TABLE 3: CEDIGAZ INDIA MEDIUM AND LONG TERM OUTLOOK – MAIN ASSUMPTIONS ........................................... 20

TABLE 4: PROSPECTS FOR INDIAN GAS DEMAND BY SECTOR (1) ‐ ....................................................................... 28

TABLE 5: PROSPECTS FOR INDIAN GAS DEMAND BY SECTOR (2) ‐ ........................................................................ 28

TABLE 6: PROSPECTS FOR GAS SUPPLY IN INDIA .............................................................................................. 30

TABLE 7: PROSPECTS FOR LNG INFRASTRUCTURE DEVELOPMENTS IN INDIA ........................................................... 30

LIST OF FIGURES

FIGURE 1: RECENT TRENDS IN CHINA’S ENERGY MIX ........................................................................................... 7

FIGURE 2: RECENT TRENDS IN CHINA’S GAS SUPPLY ............................................................................................ 8

FIGURE 3: CHINA LONG TERM OUTLOOK – MAIN TRENDS .................................................................................... 9

FIGURE 4: CHINA’S ENERGY MIX IN 2016 ....................................................................................................... 10

FIGURE 5: CHINA’S ENERGY MIX IN 2040 ....................................................................................................... 10

FIGURE 6: EVOLUTION OF CHINA’S GAS DEMAND, 2010‐2018 ......................................................................... 11

FIGURE 7: VARIATIONS IN GAS DEMAND (2016‐2040), TOP‐10 COUNTRIES ........................................................ 12

FIGURE 8: PROSPECTS FOR CHINA’S GAS DEMAND BY SECTOR (BCM) ................................................................... 13

FIGURE 9: PROSPECTS FOR CHINA’S GAS SUPPLY (BCM) ..................................................................................... 14

FIGURE 10: CHINA’S GAS NETWORK .............................................................................................................. 15

FIGURE 11: RECENT EVOLUTION OF INDIA’S ENERGY DEMAND BY FUEL ............................................................... 17

FIGURE 12: INDIA’S SECTOR‐WISE NATURAL GAS CONSUMPTION DURING 2016‐17 .............................................. 17

FIGURE 13: HISTORIC EVOLUTION OF INDIA’S GAS SUPPLY (BCM) ....................................................................... 18

FIGURE 14: INDIA LONG TERM OUTLOOK – MAIN TRENDS ................................................................................. 20

FIGURE 15: INDIA’S ENERGY MIX IN 2016 ...................................................................................................... 21

FIGURE 16: INDIA’S ENERGY MIX IN 2040 ...................................................................................................... 21

FIGURE 17: REGIONAL CGD GAS CONSUMPTION .............................................................................................. 27

FIGURE 18: 9TH BID ROUND GAS ................................................................................................................... 27

FIGURE 19: PROSPECTS FOR INDIA’S GAS DEMAND BY SECTOR (BCM) .................................................................. 29

FIGURE 20: PROSPECTS FOR INDIA’S GAS SUPPLY (BCM) .................................................................................... 29

FIGURE 21: INDIA’S NATURAL GAS FIELDS AND INFRASTRUCTURE ....................................................................... 31



EXECUTIVE SUMMARY


Critical Drivers and Challenges

Accelerated reforms and focused policies aimed at increasing the role of gas and renewables in the

energy mix combine to improve the natural gas demand outlook of China and India. In this report,

the International Association CEDIGAZ provides its revised medium and long term outlook for natural

gas demand and supply in these two key markets and analyses the main drivers and challenges

surrounding these prospects.

Projections on global primary energy demand and the structure of the energy mix are based on

assumptions on the evolution of the world economy, population, energy and environmental policies

and technological improvements (energy efficiency, development of renewables…). According to the

latest prospects of CEDIGAZ, energy consumption is expected to grow by 26% up to 2040, as the

extent of the economic growth is mitigated by significant improvements in energy efficiency.

This scenario, which incorporates national energy plans1, highlights the growing role of natural gas as

a key transition fuel towards an increasingly renewable‐based, efficient and sustainable energy

system. The transition to a lower carbon mix accelerates under this scenario, with non‐fossil fuels

accounting for more than half of the incremental energy demand over 2016‐2040.

Virtually all the growth in world energy demand comes from fast‐growing emerging economies.

China and India will stand as the largest growth markets for energy. More than two‐thirds of the

global energy demand growth is explained by India (30%), China (21%) and other emerging Asian

markets (16%).

Gas stands as the fastest‐growing fossil fuel over 2016‐2040 (+ 1.4%/year) and increases its relative

share in the world primary energy supply from 22% in 2016 to 24% in 2040, overtaking coal (22%) by

this horizon. India and China both start with coal‐intensive fuel balances but will experience total

opposite trends in coal consumption over the outlook period. The consumption of coal declines

strongly in China. However, it continues to grow at significant pace in the power sector in India,

although coal’s share in power generation falls to the profit of renewables, and to a lesser extent,

natural gas. As natural gas in China and India hardly competes with coal on a cost‐basis, the

substitution from coal to gas requires a strong support of policies and a fast pace of reforms. Past

natural gas developments since 2000 in these two markets show very different trends, which attest

to the key role of policy measures to support gas demand and supply.

In 2016, the penetration of gas in the energy mix of these two countries was among the lowest in the

world, illustrating a strong potential for future gas expansion in every consuming sector. The main

natural gas demand drivers in these two markets will be the economic expansion, the urbanization,

as well as energy and environmental policies. Indeed, both of these countries face the same

environmental challenges, namely to reduce air pollution, particularly in urban areas. China and

1 Some National Energy Plans are viewed with caution by Cedigaz and key targets can be delayed when

considered too challenging.



India’s signing of the Paris Agreement should support the role of natural gas in their countries’

energy mix. Local policies also strongly support the development of natural gas in cities.

In Cedigaz Scenario, substantial domestic production growth and the expansion of pipeline and LNG

infrastructure will bolster growth in gas consumption across various sectors in India and China.

Cedigaz prospects for gas demand in these countries are among the highest in the forecast ranges of

the different institutions. Cedigaz integrates the objectives of China’s national energy plans.

However, for India, natural gas demand projections and the share of gas in the energy mix fall short

of the government’s ambitious targets. Cedigaz Scenario is also based on favourable assumptions as

regards the advancement of market‐oriented reforms in both the gas and electricity sectors. Cedigaz’

projections show a strong growth of almost 5%/year in natural gas demand in these two countries by

2040, during which natural gas will expand its share in the energy mix, against the background of a

massive deployment of renewables, specifically wind and solar.

In the short term, industry and city gas distribution are expected be the most important drivers to

growth, but there is also major potential upside in gas demand for power generation (China) and

transportation in a longer term perspective.

China and India are expected to be the fastest‐growing gas markets worldwide in volume terms,

playing a growing role on the global natural gas market. Together, these two countries will account

for 40% of the future growth in both the global natural gas and LNG demand and will respectively

become the second and sixth largest gas consumers. The paradigm transformation in the Indian and

Chinese energy patterns will increasingly influence and shape the global natural gas market. China’s

role in determining gas prices will become essential.

As indigenous production will not keep pace with the fast‐growing demand, imports will grow

strongly. In this context, China and India will seek to enhance the diversity, the flexibility and the

affordability of natural gas supply. LNG will play a key role in this respect as the pricing, commercial

and contractual conditions continue to evolve in a rapidly growing global LNG market, which is also

becoming more competitive. LNG demand is expected to grow especially fast in the short term,

backed by the ramping‐up of LNG regasification capacities and the existence of abundant LNG

supplies. Uncontracted LNG imports will gradually grow in the longer term to meet the growing gas

demand. The role of domestic gas (including unconventional gas) and pipeline imports (China) will be

also increasingly important to cover domestic demand.

The expected growth of the Chinese and Indian gas markets and their supply security are contingent

on the mobilization of massive investments to develop new fields and new transportation

infrastructure. The implementation of an appropriate regulatory framework is crucial to promote

investments and gain industry confidence.

Another main challenge will remain the affordability of natural gas supply, because of the strong

competition from cheap coal and more and more renewables, especially in the Indian context. In this

regard, government policies have yet to clarify the future positioning of natural gas in the power

generation mix in relation with the other fuels, including coal and renewables.

Recent reforms have started to provide good incentives for the natural gas investors in China and

India. These countries have become the central points of the Asian gas market attractiveness, as they

hold potential in offering significant business opportunities for industry players.



1. CHINA MEDIUM AND LONG TERM NATURAL GAS OUTLOOK

1.1. Recent trends in the national energy mix

China is playing a growing role on energy markets, accounting for around half of the growth in global

energy demand since 2000. However, the country has experienced a slowdown in the growth of its

energy demand in recent years, from an annual average of more than 8% between 2000 and 2010 to

3.3%/year since 2010. This trend illustrates the structural changes in the economy, which is shifting

from the energy‐intensive industrial sectors to the service sector. It should be pointed out that the

national policy has strongly promoted energy efficiency. Energy intensity in China declined by almost

3%/year over the period 2000‐2016, although a high potential still remains

The structure of the energy mix is progressively shifting away from coal, and, to a degree, oil to

cleaner sources of energy, including natural gas. Coal consumption has even continuously fallen over

the period 2013‐2016, down 1.4%/year, despite a recent slight recovery

Natural gas demand has surged by more than 12%/year between 2010 and 2017. In parallel, the

share of natural gas in the energy mix has increased from 2% to 7%.

FIGURE 1: RECENT TRENDS IN CHINA’S ENERGY MIX (MTOE)

Source: Cedigaz, IEA

China has been increasingly dependent on imports to meet its booming gas demand. Import

dependency rose tremendously from 15% in 2010 to 39% in 2017. In recent years, the role of

pipeline gas in gas supply has declined to the profit of LNG, in a context of a fast‐growing flexible and

spot LNG supply. The dependence on LNG imports rose from 14% in 2015 to 17% in 2016 and 22% in

2017, while that of pipeline gas imports flattened at around 17% amid commercial issues with

Turkmenistan. China has a fast‐growing impact on the international natural gas trade. In 2017, it

overcame the United States to become the world’s third largest natural gas importer, accounting for

8% of international natural gas flows, behind Germany (11%) and Japan (9%). In terms of LNG

imports, it eclipsed South Korea to become the second largest LNG buyer after Japan.

Natural gas consumption during the first ten months of 2018 increased by 16%, while imports were

up by 33% over the period. LNG imports in particular surged by more than 40% over the period.



FIGURE 2: RECENT TRENDS IN CHINA’S GAS SUPPLY (BCM)

Source: Cedigaz (September 2018)

1.2. Prospects for China’s energy mix

Projections on primary energy demand to 2040 are based on assumptions on the evolution of the

world economy, population, energy and environmental policies and technology (Table 1).

Energy consumption in China is expected to grow by 0.9%/year between 2016 and 2040, as the

extent of the economic growth is mitigated by significant improvements in energy efficiency

(‐ 3.5%/year decline in energy intensity).

The long‐term goals of China’s energy policies are to build a more secure, sustainable, diverse and

efficient energy system. Driven by supportive energy and environmental policies, the use of low‐

carbon fuels rises strongly during the projection period, especially for power generation.

China has taken immense strides towards developing renewable energy sources and is by far the

world’s largest market for solar PV and wind power today. The country has deployed more

renewable power generation capacity than any other country. According to the International Energy

Agency (WEO 2017), wind and solar PV totalled an electrical capacity of 226 GW in 2016, 30% of the

world total, and accounted for 5% of power generation. With average costs falling below those of

new gas‐fired generation, solar PV is rising particularly fast, with capacity surging 80% in 2016, to an

estimated 77 GW (WEO 2017).

In Cedigaz Scenario, China alone accounts for more than a quarter of the global growth of renewable

energy (bioenergy and hydro included) over the 2016‐2040 projection period. China meets

commitments for non‐fossil fuels to reach 15% of the national primary energy mix by 2020 and 20%

of the energy mix by 2030, as it is set out in its NDCs for the Paris agreement. In 2040, non‐fossil fuels

are forecast to represent more than 25% of the total energy mix.

Under the Paris agreement, China has committed to peak its CO2 emissions by 2030 or sooner, to

reduce its carbon intensity by 60‐65% by 2030, against a baseline of 2005. China has already met its

2020 carbon intensity target, three years ahead of schedule.

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Production



TABLE 1: CEDIGAZ CHINA MEDIUM AND LONG TERM OUTLOOK – MAIN ASSUMPTIONS

Economy GDP growth of 4.5%/year (2016‐2040).

Demographics Zero population growth (2016‐2040).

Environment INDC commitments (reduction of carbon intensity by 60‐65% by 2030, against a baseline of 2005).

Energy Policy National Energy Plans & FYP 2016‐2020.

Infrastructure • Line D from Central Asia from 2023. • 3th and 5th West‐East Gas Pipeline. • Russia‐China Pipeline (Eastern Route) from 2019. • Western Route Pipeline Project to be postponed indefinitely.

Technology • Only current and approved technologies. • Rapid improvements of economics of REN. • Energy efficiency improves significantly.

Supply availaibility

• Unconventional gas as the fastest‐growing supply source post‐2025. • Development of vast conventional gas resources, tight gas included.

Pricing • Growing role of spot LNG in gas supply. • Accelerated evolution towards market pricing. • CO2 price of $40/tonne ($2016) in 2040.

Source: CEDIGAZ Medium and Long Term Natural Gas Outlook 2018

FIGURE 3: CHINA LONG TERM OUTLOOK – MAIN TRENDS

%/year




Official authorities have recognized that natural gas has a vital role to play in complementing

renewable energies. Natural gas is the biggest beneficiary of the 13th Five‐Year‐Plan (2016‐2020),

which is the first white paper on the development of natural gas. Total gas supply capacity is

expected to rise to 360 bcm by 2020. The gas accessibility ratio of urban residents reaches 50%‐55%

and gasification vehicle reaches 10 million by this horizon. The FYP has prioritized natural gas for

industry (in replacement of coal) and for power generation as gas‐fired power generation capacity is

set to increase strongly to 110 GW in 2020 (+ 44 GW).

The primary objective of the government, which is unveiled in Policy documents2, is to raise the

share of natural gas in the energy mix to 10% in 2020 and 15% in 2030. In Cedigaz Scenario, natural

gas demand is expected to rise by 5%/year to 650 bcm up to 2040. Natural gas accounts for more

than 15% of energy consumption in 2040, compared to only 6% in 2016.

FIGURE 4: CHINA’S ENERGY MIX IN 2016

FIGURE 5: CHINA’S ENERGY MIX IN 2040


2 Energy Supply and Consumption Revolution Strategy (2016‐2030); Notice on Accelerating the Use of Natural Gas (June 2017); 2018 Energy Work Guideline (February 2018).



1.3. Prospects for China’s natural gas demand

While natural gas in China is not cost‐competitive with coal3, the substitution from coal to gas

requires a strong push of the relevant authorities, as well as financial incentives. It is worth noting

that recent political measures under the “Blue Skies” policy have given a strong momentum to

China’s gas demand. These include the followings:

‐ Policy‐driven reduction of end‐user prices to encourage coal‐to‐gas switching.

‐ A powerful drive for coal boiler conversion to natural gas (targets set on a national level, and then

translated to local targets) for the industrial and residential/commercial users.

‐ The new anti‐smog plan for 2018‐20, which suggests efforts to clean up air pollution are

intensifying. The focus is on coal‐burning facilities in more and new provinces than the previous plan

, which have now to replace coal by cleaner fuels like gas and renewables.

‐ New residential connections – Target to increase penetration from 35% to 85%.

‐ Incentives to increase the use of CNG/LNG for transport (gas prices discounts).

‐ Reinforced Northern China air quality measures, including the 2017‐21 winter clean heating plan. In

August 2018, a draft government plan was published indicating it wants nearly 4 million more

households in the key northern Beijing‐Tianjin‐Hebei economic zone to ditch coal for heating before

cold weather sets in.

‐ Price Reform Policy to incentivise investments in gas storage (NDRC, 2016). Market‐based rates

were introduced for storage services & storage gas sales.

FIGURE 6: EVOLUTION OF CHINA’S GAS DEMAND, 2010‐2018


China’s gas pricing reform is evolving towards market pricing. In 2016, prices were deregulated for

fertilizer producers. In August 2017, baseline city‐gate price was reduced by USD 0.4 MBtu. In Fujian,

city gate pricing regulation was abolished. The West‐East Pipeline (WEP) gas will not be subject to

government‐set benchmark price but will be negotiated and determined exclusively by seller and

buyer. In the short‐term, the aim is to remove the regulated non‐residential city gate prices

3 According to the IEA WEO 2017, the carbon price needs to reach a level of $90‐170/t by 2025 for gas‐fired

power plants to displace generation from the existing large fleet of new and efficient coal plants.

Index 2010=100



nationwide. In May 2018, the National Development and Reform Commission harmonized wholesale

residential gas price levels to be at the same level as non‐residential prices starting June, 10. This

represents an important step towards national market pricing and eliminating cross‐subsidies

between customers.

Next reforms focus on breaking supplies monopolies and regulate midstream tariffs. There is no

efficient Third Party Access (TPA) to NOC pipelines and LNG regasification terminals today. Unless

China sets up strong and efficient TPA rules, it will be hard for private players to gain access to

infrastructures. Some steps have been taken recently with the establishment of pipeline rates for

major transmission lines and the government intends to create a national pipeline company. The

final step of market liberalization, establishing a reliable and liquid gas hub, will thus take time.

Recent gas market developments attest to the strong influence of the aforementioned policy

measures on gas consumption. Chinese gas consumption strongly accelerated in 2017, when it

jumped 15%, with LNG imports leaping 46%. Natural gas was the fastest‐growing fossil fuel, raising

its share of the primary energy mix from 6% in 2016 to 7% in 2017. This year 2018, the numbers look

just as strong: During the first ten months of 2018, the country consumed 16% more gas than it did in

the same period in 2017. The NEA issued guidance in February 2018 instructing the gas supply

industry to prioritise the construction of the infrastructure needed to push the share of gas in the

energy mix up to 7.5% by the end of the year.

In Cedigaz Scenario, China alone accounts for more than 30% of the global incremental gas demand

between 2016 and 2040. China becomes the second‐largest gas consumer in the world as soon as

2025, only surpassed by the United States.

FIGURE 7: VARIATIONS IN GAS DEMAND (2016‐2040), TOP‐10 COUNTRIES Unit: Bcm


Natural gas demand is expected to record significant growth across all sectors (Figure 8). China’s gas

demand is expected to grow the fastest in the short and medium term, driven by economic growth,

urbanization and coal‐to‐gas switching policy. Every sector contribute to this gas surge, but the main

driver will be the ongoing switch from small coal‐fired to natural gas‐fired boilers for industrial and



residential use, as well as the growth of natural gas as a feedstock for the petrochemical and fertilizer

industry. So far, the focus on air pollution has not been sufficient to drive gas generation except in

some prosperous provinces. In the longer term, there is still major potential upside in demand across

all sectors, particularly power and transportation, which are relatively undeveloped.

In the power sector, natural gas has a major role to play in facilitating the integration of a larger

share of variable renewables in peak or intermediate loads. The government has proposed three

main development directions for natural gas power generation in the future (Notice on Accelerating

the use of gas): one is to accelerate the construction of natural gas peaking power stations, the

second is to vigorously develop natural gas distributed energy (DE) projects, and the third is to

develop natural gas cogeneration in key areas of air pollution prevention and control. The ongoing

reform of the power sector and the establishment of a market for ancillary services, such as peaking

generation, will promote natural gas generation.

In the transportation sector, the demand growth will be mainly driven by the use of LNG for long‐

distance transportation of passengers and goods, and as bunker fuel in river and coastal

transportation. The expansion of LNG use for road and marine transportation is strongly encouraged

by government policies.

FIGURE 8: PROSPECTS FOR CHINA’S GAS DEMAND BY SECTOR (BCM)


TABLE 2: PROSPECTS FOR CHINA’S GAS DEMAND BY SECTOR (BCM)

Power generation Industry, feedstock and energy

Residential‐

commercial Transportation

2016 45 82 57 22

2025 95 175 115 36

2040 180 225 170 75




1.4. Prospects for China’s gas supply

China’s gas supply will comprise a growing portion of LNG in the short and medium term. The expiry

of existing contracts combined with a strong LNG demand growth will result in rising uncontracted

LNG demand. This latter is forecast to reach 53 bcm in 2025 and 125 bcm in 2040.

The dependence on LNG imports is expected to rise from 17% to 27% from 2016 to 2025. The year

2017 already highlighted some urgent needs for LNG regasification capacity expansion, especially in

the North. China’s regasification capacity was estimated at 54 mtpa at the end‐2017, while under

construction projects represented a total capacity of 35 mtpa. The increase in regasification capacity,

combined with growing utilization rates of terminals, will support the future growth in LNG imports.

These latter should be increasingly backed by flexible and short term LNG, whose role will expand on

the global market.

In the first ten months of 2018, LNG imports surged more than 40% from the same period of the

previous year, reaching 55 bcm, while pipeline imports grew 24% to 44 bcm.

Aside from LNG, the Chinese state council is targeting aggressive increases in domestic gas

production among other mechanisms to improve the country’s supply security. It is noteworthy that

domestic gas production has recently strongly increased. In the first ten months of 2018, natural gas

production climbed 6% from the same period of the previous year.

The state plans to continue subsidizing shale gas production to boost gas output. The subsidy will

continue in the 14th five‐year plan in 2021‐25, and tight gas output will also start being subsidized in

the period. China has rowed back on earlier unconventional output targets amid limited growth so

far. The country looks likely to miss its target of 30 bcm of production by 2020. However, from 2025,

unconventional gas (including tight gas) is likely to become the largest source of domestic supply

growth and will play a key role in improving the security of supply and mitigating import dependency.

According to Cedigaz forecasts, shale gas production rises from 8 bcm in 2016 to 35 bcm in 2025 and

90 bcm in 2040. These forecasts assume oil price as high as $80/bbl which is required to boost the

necessary investments.

FIGURE 9: PROSPECTS FOR CHINA’S GAS SUPPLY (BCM)




In the long term, growing pipeline gas imports in China will put the country in a unique strategic

position, as it will benefit from a well‐diversified natural gas supply. Pipeline imports to China are

expected to grow strongly after 2020 due to incoming Russian pipeline gas (Power of Siberia pipeline)

and the additional flows via line D of the Central Asia‐China pipeline, mainly from Turkmenistan.

Expansion and accessibility of the gas supply infrastructure (including domestic pipelines and

underground gas storages) are key enablers for the expected growth in gas and LNG demand. China’s

industries are often geographically dispersed around China’s large conurbations, highlighting the

need for infrastructure availability to unlock this growth potential and bring more natural gas to the

industrial centers.

As domestic gas supply has been insufficient to meet surging gas demand, and due to insufficient

infrastructure, China has experienced severe gas shortages in recent winters. Natural gas supply

shortage are worst in the North, but have spread to central China and in the East. China’s coal to gas

switching policy has created gas shortage issues for city gas companies throughout the year, not just

in winter. Due to limited LNG regasification capacity in the North, state companies have diverted gas

from other regions to the North, placing the South in a gas shortage situation too.

What is needed are new pipelines feeding both importing and domestic gas to northern China. Some

local pipes in the north have also yet to be built. As the seasonality of gas demand has increased,

there is an acute lack of gas storage capacity, amid cost issues. Chinese companies have been

reluctant to invest in more pipelines or gas storages when midstream profits have been lower than

upstream profits (northwest). In the past, China’s gas demand growth has been underestimated,

which has not incentivised investments in infrastructure.

Beijing is accelerating plans to build more import, pipeline and storage infrastructure, but this is

unlikely to be finished in time for winter 2018‐19. The government also wants the three NOCs to

increase pipeline connectivity and improve LNG distribution by trucking more LNG from the South to

the North. Increasing investment in key pipelines, LNG import terminals (notably in the North) and

gas storage (with very ambitious plans announced by NOCs) are expected to solve the shortage issue

in the medium term

FIGURE 10: CHINA’S GAS NETWORK

Source: Cedigaz



2. INDIA MEDIUM AND LONG TERM NATURAL GAS OUTLOOK

2.1. Recent gas market developments

India is the third largest energy consumer in the world, after China and the United States. India’s

energy consumption has more than doubled since 2000. The national energy mix is largely

dominated by coal, which accounted for 45% of total energy consumption in 2016, followed by oil

(25%) and bioenergy (22%).

India is the second largest coal consumer in the world, after China. It is also the 3rd largest country for

power generation (after US and China). Thirteen states (mainly in the western and southern region)

contribute to more than 80% of the annual energy consumption. Most of the states have

transcended from power deficit to surplus situations thanks to a rapid build‐up of coal power

capacities

Coal accounts for 76% of power generation and its demand has escalated in the past few years, to

the detriment of other fuels, especially natural gas and hydro, which encountered problems of

supply access. Growth in coal consumption by the power sector has been strongly driven by the

policy of the government in order to cope with growing electricity demand. In addition to a strong

push to increase coal production in the country, the government has been encouraging the massive

installation of new coal‐fired power plants, whose capacity reached 230 GW at the end‐2016.

Unprecedented coal‐based generation capacity additions were strongly led by the private sector.

Renewables (hydro included) shared almost 30% of the overall capacity mix in 2017. Power

generation from renewables was estimated at 217 TWh in 2016, making India the 7th largest

renewable power generator in the world.

Natural gas represented only 5.5% of the energy mix in 2016. Gas mainly substitutes or complements

oil products rather than coal, especially in the industrial sector, including fertilizers. The fertilizer

industry is the biggest natural gas user, accounting for 30% of consumption, followed by power

(23%). The role of gas in the power sector is limited to meeting peak demand and load balancing

needs.

There has been a 42% decline in gas production over 2010‐2016, which was due to sub‐optimal

performance of the KG‐D6 block and delays in development of other gas assets. The decline of

maturing fields has been further exacerbated by lower than expected outcome of the New

Exploration Licensing Policy (NELP) rounds and limited exploration activity.

Natural gas demand began to fall after 2010. Problems of affordability, accessibility and reliability of

gas affected natural gas development in many parts of the country. Natural gas demand fell by

4.8%/year on average between 2010 and 2015. Natural gas consumption declined strongly in the

power sector, but continued to grow in the other segments. The power sector saw its share in total

gas consumption falling from 47% in 2010 to 31% in 2015, while the share of industry (including

energy and feedstock) progressed from 44% to 58%. The residential‐commercial sector also

increased its share from 6% to 8%, while transportation kept a marginal share of 3%.



FIGURE 11: RECENT EVOLUTION OF INDIA’S ENERGY DEMAND BY FUEL (MTOE)

Source: IEA (WEO 2017)

From 2010 to 2015, the growing supply deficit affected large gas consuming industries. The price‐

sensitive power sector, in particular, was unable to absorb expensive LNG imports. However, the

fertilizer sector, which is strongly subsidized, has been able to maintain low fuel costs by using

natural gas. On the other hand, the introduction of lower domestic gas prices has helped the

government to reduce direct subsidies to the sector. The strong reduction of gas use for power has

led to a considerable amount of stranded capacity (estimated at around 14 GW in 2017). This

situation was mainly caused by two reasons:

‐ Gas cannot compete with low‐priced domestic coal in power generation, given the system of

merit‐order dispatch whereby the cheapest electricity is dispatched first. This is particularly

the case given the absence of an explicit disincentive to coal use, such as a carbon tax set to

high enough levels.

‐ Electricity tariffs to end‐users are regulated by state governments who have autonomy over

electricity policy. So, end‐user tariffs have been on average 20% below the cost of supply in

many states, making any pass‐through of higher‐priced gas difficult.

FIGURE 12: INDIA’S SECTOR‐WISE NATURAL GAS CONSUMPTION DURING 2016‐17

Source: Ministry of Petroleum and Natural Gas



The fall in domestic production and low price affordability of imported LNG in the power sector has

resulted in gas‐fired power plants remaining under‐utilized. The average Plant Load Factor (PLF) of

natural gas power plants stood at 26% in April 2018. As domestic production of natural gas is not

sufficient to meet the country’s gas demand, the government allocates domestically produced gas

based on Domestic Gas Allocation Policy. It is noteworthy that the power sector falls fifth in the

priority.

As the country has been unable to create sufficient natural gas infrastructure to meet the growing

gas demand, India has boosted its LNG imports, which accounted for 46% of natural gas supply in

2017, compared to 18% in 2010. India is the fourth largest LNG importer, after Japan, China and

South Korea, and accounts for 7% of the global LNG trade.

The country began importing LNG from Qatar in 2004 and has since gradually increased its imports

from this supplier to 16 bcm in 2016, 60% of total LNG imports. Qatar’s RasGas is India’s biggest long‐

term supplier of LNG, with three long term contracts totalling contracted volumes of more than 12

bcm/y. In addition, India relies on spot and short‐term LNG supplies from a variety of suppliers, the

biggest of them is Nigeria. It is estimated that spot and short‐term purchases accounted for a volume

of more than 13 bcm in 2016, around half of total LNG supply.

Indian LNG importers actively sought supply from various new LNG sources and have signed several

short and long term purchase agreements in the past few years. India has agreements with

Australia’s Gorgon LNG, several US terminals (Sabine Pass, Cameron, and Main Pass) and with some

global LNG portfolio aggregators such as Shell and Gazprom. In June 2018, the first LNG cargo from

Russia was delivered to the Dahej terminal in Gujarat. Supplies have also recently started from the

US. Cheniere Energy has a 20‐year supply agreement with GAIL from the Sabine Pass liquefaction

facility. The agreement, signed in 2011, was for the supply of 3.5 mtpa. Over the last three years,

GAIL and Petronet have reworked contracts with suppliers from the Middle East, Russia and

Australia, reducing the negotiated price and increasing delivery flexibility.

FIGURE 13: HISTORIC EVOLUTION OF INDIA’S GAS SUPPLY (BCM)


0

10

20

30

40

50

60

70

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018 (F)

LNG imports

Production



2.2. Prospects for India’s energy mix and the role of natural gas

Energy today is considered a crucial sector to achieve India’s development ambitions, support its

expanding economy and meet the needs of what is soon expected to be the world’s most populous

country. The National Energy Policy (NEP) set out national energy objectives and the strategy to meet

them. The time span of the NEP (2017‐2040) helps lay the foundation for India to match the energy

consumption parameters of developed countries over a long period.

The country is running one of the largest and most ambitious renewable capacity expansion

programs in the world. The country’s renewable energy installed capacity has more than doubled in

the last five years. The growth momentum of renewables is likely to be maintained in the coming

years. Both wind and solar energy tariffs are now less than the conventional sources. Introduction of

competitive bidding has helped the renewable energy tariffs to achieve grid parity. The government

has drawn a roadmap to bid out 30 GW of solar and 10 GW of wind capacity in the financial year

2019 and 2020 respectively. The Ministry of Petroleum also plans to achieve a 175 GW renewable

energy capacity by FY2022 (of which 100 GW from solar and 60 GW from wind), from roughly 57 GW

in FY2017 (+ 23 GW/y). This capacity is expected to rise to 275 GW by 2027, representing an average

annual addition of 20 GW.

Need for energy security has climbed, in parallel with energy supply growth and economic expansion.

India has taken actions to increase energy supply, enhance energy efficiency and reduce import

dependency. Energy efficiency is envisaged as an affordable imperative for sustainability. Among key

efficiency measures, the Ujala – Program was launched to promote use of energy efficient appliances

by residential users (distributed about 770 million LED bulbs, 20 million pump sets over last 2‐3

years). In Cedigaz scenario, India’s energy intensity in 2040 is half the level of 2016.

The energy landscape in India is experiencing a paradigm shift and the potential for future growth of

energy demand, including gas, is enormous. The energy consumption per capita is only around one

third of the global average, indicating significant scope for future growth. In Cedigaz Scenario, India’s

energy demand rises by 3.2%/year from 2016 to 2040. India contributes for the largest share, 30%, of

the growth in global energy demand. In 2040, the country will account for 11% of global energy use,

against 7% today.

There are many estimates for India’s long term gas demand, given different assumptions. India’s

future energy mix and the role of gas is a function of the interplay of various factors, including

economy and demographic trends, coal and renewable policies, the regulatory framework, pricing

and cost competitiveness of gas, climate change commitments, and the development of supply

infrastructure (Table 3). This latter is a fundamental determinant of India’s gas outlook and Cedigaz

Scenario incorporates favourable prospects in that respect.

India’s gas demand is forecast to grow by 5%/year between 2016 and 2040, while energy demand

rises by more than 3%/year. Coal accounts for around half of the future growth in energy demand up

to 2040, followed by oil (26%) and gas (11%). The share of gas in the energy mix is expected to grow

from 5% in 2016 to 8% in 2040. However, this remains short of the government targets.



TABLE 3: CEDIGAZ INDIA MEDIUM AND LONG TERM OUTLOOK – MAIN ASSUMPTIONS

Economy GDP growth of 6.1%/year (2016‐2040).

Demographics Population growth of 0.9%/year (2016‐2040).

Environment INDC commitments (reduction of emissions intensity of GDP by 33‐35% over 2005 levels, by 2030).

Energy Policy • The official 15% gas share target is not achieved. • 2022/2027 Renewables Targets not entirely achieved. • Growing role of gas in the energy and power mix.

Policy & Regulation

• Favourable policies to incentivize players and attract investments. • Broader electricity reforms post‐2022. • Advancement of upstream reforms.

Infrastructure • Rapid development of downstream infrastructure and import facilities. • TAPI & Iran‐Pakistan‐India pipeline post‐2025.

Technology • Only current and approved technologies. • Rapid improvements of economics of REN. • Current trends in energy efficiency.

Supply availability

• Steady gas production growth post‐2018. • Significant expansion of foreign and private investment.

Pricing • Growing role of free‐market pricing in the gas and electricity sectors. • Growing role of spot LNG in gas supply.


FIGURE 14: INDIA LONG TERM OUTLOOK – MAIN TRENDS

%/year




FIGURE 15: INDIA’S ENERGY MIX IN 2016


FIGURE 16: INDIA’S ENERGY MIX IN 2040


In the past, energy policies have failed to implement adequate regulatory reforms which were

necessary to increase natural gas supply and expand the role of natural gas in the energy mix.

However, this situation has evolved and there is now a more concerted push to expand the role of

natural gas in the energy mix. India has begun implementing oil and natural gas pricing reforms since

2013 to stimulate sustainable investment and help lower subsidy costs.



2.3. Prospects for India’s natural gas demand

2.3.1 Recent positive signals impacting the development of natural gas

Several recent positive developments point to a changing and more robust outlook for natural gas

demand in India.

Improvement in the economic prospects of the country

Strong economic growth should continue, driven by a thrust on manufacturing. India’s GDP growth

rebounded to 7.3% in 2014 and 2015, and 7.1% in 2016. In Cedigaz Scenario, GDP growth is projected

at 7.5%/year over 2016‐2025. This positive outlook now hinges on strong fundamentals, like

urbanization, expanding population and a favourable investment climate. Current urbanization level

hovers at 33%. It is expected to approach 50% by 2040.

Recent recovery in natural gas demand and supply

In 2016, India experienced an exceptional rise in LNG imports (+ 41%), and a rebound in gas demand

(+ 9%). In 2017, India’s gas demand is estimated up 3.3% and natural gas production returned to

growth (+ 4%), reversing a prolonged decline since its peak of 52 bcm in 2010. For 2018, natural gas

consumption is expected to be up 6%, to 62 bcm.

These developments mark an important turning point for the country’s gas sector and indicate that

the gas demand situation is changing.

Revival in policy activity around the reconsideration of gas’s role in the energy mix.

The government intends to raise the share of natural gas in the energy mix to 15% in 2030. It also

plans to double LNG import capacity in the short term, illustrating the intention to “shift India to a

gas‐based economy”. In Cedigaz Scenario, the 15% target is not achieved over the projection period,

as it is considered very challenging given the current energy and climate policies. However, focused

actions aimed to meet this target can potentially reduce the share of coal and oil in the energy mix,

to the profit of gas and renewables.

Recent revision of pricing guidelines for gas produced domestically.

In March 2016, the Ministry of Petroleum and Natural Gas announced the decision to liberalise

natural gas prices for discoveries in high‐pressure, high‐temperature reservoirs, and deepwater and

ultra deepwater areas. Following these changes, oil and gas companies will be able to freely sell their

natural gas in the market subject to a price ceiling defined as the lowest price of 1) imported fuel oil

prices; 2) weighted average of alternate fuels; and 3) LNG import prices.

The price will be revised every six months. Alongside price reforms, the government also introduced

fiscal regime changes, moving to a revenue‐sharing model with the aim of increasing transparency,

reducing potential for disputes and lowering administrative costs.

At the beginning of October 2018, the Indian government has raised prices for gas produced by state‐

controlled upstream firms by 10% to US$3.4/MBtu under the framework of a pricing formula



implemented in October 2014. Prices for supply from deepwater and unconventional fields increase

by 13% to $7.7 MBtu from $6.8 MBtu. The prices are on a gross calorific basis.

The price hike began on 1 October 2018 and will last for a 6‐month period. This move will in turn

increase the margins for national producers such as Oil and Natural Gas Corporation (ONGC) and

Reliance Industries (RIL) but is also expected to translate into higher prices for compressed natural

gas (CNG), piped natural gas and in turn result in higher costs for electricity production. This price

hike is the highest level since October 2015 to March 2016, when the price reached US$3.8/MBtu.

The last hike occurred in April‐September 2018 and set prices at US$3.1/MBtu from US$2.9/MBtu in

the previous months.

However, the increase still leaves prices for conventional supplies at less than a third of the cost of

imported LNG.

The discovered Small Fields Policy and Bidding Round (“DSF Bid Round”)

The “DSF Bid Round” was launched in 2016 in order to develop and commercialize production from

the already discovered small fields, marking an important milestone towards a new growth era of the

production of natural gas in India. Forty six contract areas consisting of sixty seven fields spread

across nine sedimentary basins were offered in the first bidding round.

INDC Commitments and environmental policies to increase gas usage

The targets are on reducing the emissions intensity of GDP by 33‐35% over 2005 levels, by 2030.

Access to Gas as Clean Fuel has been a top priority post signing of COP21. The environmental

objectives also comprise the creation of an additional carbon sink of 2.5‐3 billion tons of CO2 through

new forest cover. Moreover, the intention to reduce urban pollution is clearly mirrored by

government initiatives such as increasing gas usage and replacing diesel with CNG in public transport

and LNG in M&HCV. In addition, the 9th City Gas Distribution Bidding round is a strong initiative which

will increase gas usage and address urban pollution across the country.

The implementation of an ambitious renewable capacity target

As mentioned on page 19, renewable energy is at the forefront of growth in capacity addition. India’s

environmental targets submitted at COP21 include an aggressive plan to expand its renewable

generation capacity, aiming to generate 40% of electricity from non‐fossil fuels by 2030 ‘with the

help of technology transfer and low cost international finance’. Should the renewables targets not

entirely be met in the next ten years, this opens up potential further opportunities for power gas.

Natural gas has an important role to play in parallel with the massive expansion of renewables as it is

considered a very efficient and flexible energy source, with start‐up times of 40 minutes compared

with 5‐7 hours for inflexible coal, and minimum output limits of 15‐30% compared with 40‐60% for

inflexible coal.



An intensive awareness of the need to curb air pollution in India states and cities,

especially visible in the transport sector.

Policy and programmes to encourage CNG‐based taxis and buses, provide solid basis for a continued

expansion of gas in the transport sector. Several political measures have been taken recently:

‐introduction of cleaner / alternate fuels like gaseous fuel (CNG, LPG etc.)

‐universalization of BS‐IV emission standards from 2017;

‐leap‐frogging from BS‐IV to BS‐VI fuel standards from 1st April, 2018;

‐collection of Environmental Protection Charge on more than 2000 CC diesel vehicles;

‐notification of National Ambient Air Quality Standards;

‐setting up of monitoring network for assessment of ambient air quality; and

‐issuance of directions under Section 18(1)(b) of Air (Prevention and Control of Pollution) Act, 1981

and under Section 5 of Environment (Protection) Act, 1986.

As regards LNG fuel for transport, the Kochi LNG terminal remains India’s sole LNG bunkering facility

for marine vessels. The Ministry of Shipping reports Inland Waterways Authority of India (IWAI) has

entered into an agreement with Petronet LNG Ltd that will see additional bunkering facilities as well

as the introduction of LNG fuelling stations for heavy duty land transport. Early plans proposed

several new facilities would be operational before the end of 2018. An LNG bunkering facility is being

planned at Ghazipur terminal.

Political initiatives to increase gas usage in the power and fertilizer sectors

There have been political initiatives to revive the stranded gas‐based capacities in the power and

fertilizer sectors and make imported LNG affordable. In the power sector, the government had

provided subsidy through a reverse bidding scheme, to allow stranded power assets to operate at

30%. The Reverse Bidding Scheme (subsidy) for utilization of gas power generation capacity was

enacted in 2015 but is now closed. In the fertilizer sector, the government aims to increase urea

production by 3.7 million metric tonnes per year by FY2019 through gas pooling policy (uniform

delivery cost by averaging domestic and LNG/gas prices). This measure was also implemented in

2015.

The new Hydrocarbon Exploration and Licensing Policy (HELP)

In March 2016, the Indian Government introduced its new Hydrocarbon Exploration and Licensing

Policy (HELP), which aims to boost upstream investment, by offering pricing reforms and marketing

freedom, for deep‐water gas and coal bed methane gas (CBM). Additionally, HELP aims to promote

upstream participation by allowing investors to select their own blocks for exploration, through an

Open Acreage Licensing Policy (OALP), and by revising E&P operator’s production sharing contracts.

HELP has already yielded significant progress in boosting domestic gas production and will likely

provide greater incentives for companies to invest in India’s deepwater fields. HELP forms part of a

government strategy to double India’s oil and gas output in the next five years.

In January 2018, under the HELP and OALP Bid Round‐1, the Ministry of petroleum and natural Gas

published a Notice inviting offers (NIO) for Exploration and Development of Oil and Gas Blocks, which

spread over 60,000 sq km, for unexplored acreage in India. Based on the Expression of Interest (EOI),

which was received between July 2017 and November, 15, 2017, a total of fifty five blocks, which

include 46 on‐land blocks, 8 shallow water blocks and 1 deep water block, are on offer through the



International competitive bidding process. The company Vedanta Limited has won the majority 41

out of 55 oil and gas blocks, followed by Oil India (9 blocks) and ONGC (2 blocks). GAIL and

BharatPetroResources won one block each. The offered blocks are mostly located in the

northeastern state of Assam and the western state of Gujarat and Rajasthan.

Cedigaz Scenario assumes that domestic production will gradually grow after 2018, as a result of

upstream reforms. Increase in domestic gas production will strengthen India’s gas demand growth

potential. ONGC and Reliance have been incentivized to spend billions of dollars on eastern offshore

blocks after the government reformed domestic pricing. The higher price for deepwater and

unconventional fields applies to only a meagre proportion of Indian production, although it is likely

to gain relevance as deepwater investment increases. BP and Reliance are spending $6bn on three

projects in the deepwater Krishna Godavari basin that will produce 35 Mm3/d of gas.

The growing importance of market‐based gas pricing

International LNG trade (including spot LNG), which is expected to be a major source of additional

supply, will support the development of a competitive wholesale market, based on gas‐to‐gas

competition. However, this latter also requires significant regulatory and institutional reforms. The

Petroleum and Natural Gas Regulatory Board (PNGRB) that oversees natural gas related policies

issued in April 2018 a tender to hire advisory services to launch a natural gas trading hub “where

natural gas can be traded, and supplied through a market‐based mechanism instead of multiple

formula driven prices”. India plans to establish a gas trading hub by December 2018.

Officials believe this hub will help narrow the gap between domestic prices and higher import gas

prices. PNGRB is now seeking a consultant to develop a regulatory framework for the exchange. The

development of a gas hub is intended to provide the right price signals to investors so that gas could

increase its share in the energy basket but this is expected to take time as liquidity is lacking: Crucial

sectors like city gas distribution, power and fertilizers get priority access to domestic production,

with little left for trading. In addition, around half of LNG imports are still brought in under long‐term

contracts. Another issue is the government interference. For the Indian exchange to work, natural

gas prices should be liberalized, but that raises social issues and political challenges as rates of

industries, like fertilizers and power, are capped by the government to protect consumers.

A new wave of significant downstream regulatory reforms

The government plans to split the marketing and distribution businesses of state‐owned pipeline

company Gail, and ordering LNG terminals to open a fifth of their capacity to third parties. PNGRB is

considering a new distribution tariff system to make pipeline lines profitable and broaden the

consumer base.

Recent policy measures to expand infrastructure

These measures include:

‐ Capital Grant for Transmission Pipelines to connect Eastern India

‐ New LNG terminals

‐ North Eastern gas grid

‐ LNG as a transport fuel for M&HCVs/Ships/Railways



2.3.2 Prospects for natural gas development by consuming sector

According to Cedigaz, India’s gas demand is expected to grow by 5.6%/year over 2016‐2025. This

growth slows down to 4.5%/year over 2025‐2040 due to a slower economic and demographic

growth, an accelerating expansion of renewables and also the development of more efficient thermal

plants. Natural gas consumption is forecast to more than triple from 56 bcm in 2016 to 175 bcm in

2040. India’s gas demand is expected to record the fastest growth in the short and medium term,

driven by the industrial (including fertilizer) and City Gas Distribution (CGD) sectors, which are less

price sensitive and benefit from priority access under the government allocation policy.

Developments in pipeline and regasification infrastructure will help unlock LNG imports for India’s

industrial sector, particularly in the south and east. Natural gas will displace liquid fuels in particular.

The government is encouraging self‐sufficiency in the fertiliser industry (food security), which is

poised for rapid expansion in the short and medium term. Therefore, Cedigaz expects robust growth

of 5.4%/year of natural gas demand in Industry from now to 2025, driven by the fertilizer sector.

Other factors such as the growth of India’s refining sector, setting up of chemicals and petrochemical

parks and other similar industries would significantly add to gas demand in the coming years.

Coal and renewables are expected to contribute for the bulk of the growth of power generation in

the next five years. India’s draft National Electricity Plan has envisaged an addition of 4.3 GW of gas‐

based capacity that has already been developed as of 2017, but there is no new capacity addition

thereafter. From a short‐term perspective, the current low PLF of coal‐fired power plants means that

they could easily increase their production without any investment in new coal‐fired capacity. The

electricity price in India is regulated, making it harder for LNG to compete with cheaper domestic gas

or domestic coal.

However, Cedigaz expects an acceleration of gas demand in the power sector after 2022, assuming a

more competitive wholesale market, which means an improvement of the regulatory framework and

a gradual deregulation of power prices. Broader electricity reforms and increased electricity tariffs

will be essential in order to give incentives to local distribution companies. The future growth in

power gas demand is also contingent on the growth of domestic production. An explicit disincentive

to coal use, such as a coal tax set at high enough levels, would be necessary to trigger a large‐scale

substitution of coal towards cleaner fuels and/or more probably, to allow rising electricity demand to

be met exclusively by cleaner fuels. A tax was introduced on coal production in 2014, but is not

enough to encourage coal‐to‐gas switching. It is estimated, for instance, that at a wholesale gas price

of $5/MBtu, the tax per tonne of coal would have to be around $20/tonne, as opposed to $6/tonne

in 2017. However, such measure, which would induce a large‐scale coal‐to‐gas switching, seems

politically difficult and is not envisaged in Cedigaz Scenario.

The natural gas share in the power generation mix is expected to remain limited, as the government

is strongly promoting green energy sources, such as wind and solar. It is likely that natural gas‐fired

capacity will remain an instrument to reduce power shortage and balance intermittency.

The government is strongly promoting the use of natural gas in the residential sector as an

alternative to LPG and biomass as cooking fuels, as well as in the transport sector, where there is

large scope for growth. In order to put thrust on development of City Gas Distribution (CGD) network

for securing the un‐interrupted supply of cooking and transport fuel to public at large, the

Government has accorded the priority in domestic gas allocation to PNG (Domestic) and CNG



(Transport) segments. The government has decided to meet 100% demand of CNG and PNG sectors

through supply of domestic gas. Further, GAIL has been authorized to supply 10% over and above the

allocation to meet any fluctuation in demand. Domestic gas has also been diverted from non‐priority

sectors to meet the additional demand for city gas distribution networks. At present, CGD sector is

consuming around 4 bcm of indigenous domestic gas for CNG and PNG sector. There is

approximately 3 bcm of imported Re‐gasified Liquefied Natural Gas (RLNG) by Commercial and

Industrial segment of CGD sector.

Consumption in these sectors is currently small relative to that in power and fertilizer, but is

expected to post the strongest growth in percentage terms up to 2025, driven by increased

penetration and new Geographical Areas (GA) allotments. The CGD sector has witnessed interest

from multiple private players. In May 2018, India has held its first road show outside the country to

expand city gas distribution. This new auction of licenses, the ninth for city gas, would almost double

the area covered by local distribution systems. GAs provide access to vast untapped areas in Eastern

and Southern India. PNGRB has invited bids for city gas projects in 86 areas accounting for 29% of the

population. City gas projects have so far been rolled out in 91 areas covering 19% of the population.

The 91 GAs, which are operated by 36 companies, total over 4 Mn Domestic PNG connections and 3

Mn CNG vehicles. This licensing round, which attracted over 400 bids from both state‐owned and

private companies, was oversubscribed, which may support growth in the country’s aggregate

demand. Changes in bidding parameters will continue to drive gas market development.

FIGURE 17: REGIONAL CGD GAS CONSUMPTION

FIGURE 18: 9TH BID ROUND GAs

Source: PPAC, Feb 2018, PNGRB



Natural gas demand in the residential and commercial sector is forecast to rise by 6.7%/year over

2016‐2025 and 3.8%/year over 2025‐2040. While this sector enjoys priority access, distribution

companies can pass their costs to retail customers (unlike for instance the power sector), thus

making investments in gas distribution a more viable business than for other sectors.

India aims to connect 10mn households by 2019. Nearly half of the existing 3.6mn household

connections are in Gujarat state, where two of the country’s four LNG terminals are based. The

expansion of the pipeline grid will support demand for LNG imports.

Natural gas demand in the transport sector is expected to almost double up to 2025. India already

has the fifth‐largest natural gas fuelled vehicle fleet in the world. CNG is now prevalent in around 11

(out of 29) Indian states, with many cities mandating its use in public transport (taxis, auto‐rickshaws

and buses). The Indian Supreme Court gave the sector a boost when in late 2015 it mandated that all

Delhi taxis must convert to CNG and registration of new diesel vehicles in the city will no longer be

allowed. Growth in this sector is severely constrained by infrastructure. India’s Petroleum Planning &

Analysis Cell reports that as at December 2017, there were 3.045 million natural gas vehicles (NGV)

but only 1,282 CNG filling stations. The number of stations has increased by just 379 since 2013. CNG

infrastructure (March 2017) is disproportionately skewed towards three states: the National Capital

Territory of Delhi (421 stations), Gujarat (396 stations), and Maharashtra (245 stations). In order to

promote the CNG services in the country, the Government has issued guidelines for making available

domestic gas to the City Gas Distribution entities for meeting the entire requirement of CNG for

transport segments.

TABLE 4: PROSPECTS FOR INDIAN GAS DEMAND BY SECTOR (1) ‐ BCM

Year Power generation Industry, feedstock and energy Residential‐commercial

Transportation

2016 17 30 5 2

2025 26 48 10 4

2040 80 72 16 7


TABLE 5: PROSPECTS FOR INDIAN GAS DEMAND BY SECTOR (2) ‐ BCM

Year City Gas demand

Fertilizer demand

Non‐fertilizer industrial demand

Power demand

Grand Total

2016 7 15 16 17 55

2018 (F) 9 16 19 18 62

2020 12 19 21 19 71

2025 15 25 22 26 88

2040 23 39 33 80 175




FIGURE 19: PROSPECTS FOR INDIAN GAS DEMAND BY SECTOR (BCM)


2.4. Prospects for India’s natural gas supply

India will have to both rely on LNG and domestic production to meet its growing gas demand. In the

short term, LNG imports are anticipated to grow the fastest, because of relatively abundant and low‐

priced LNG supply expected for 2019‐2020 and the timeframe for bringing new fields on stream, as

well as the progressive nature of the new fields’ production ramp‐up. Indeed, most commercial

upstream gas projects have been delayed in recent years owing to supply costs in the context of a

low price environment. However, domestic production is expected to grow gradually post‐2018,

driven by new developments in the eastern and western offshore basins. Additionally, with pricing

freedom announced for coal bed methane (CBM) gas, Cedigaz expects strong interest in developing

CBM blocks. Increasing gas prices post‐2025 will support domestic unconventional production, as

shown in the figure below.

FIGURE 20: PROSPECTS FOR INDIA’S GAS SUPPLY (BCM)




India has four existing LNG receiving terminals (Dahej, Hazira, Dabhol and Kochi), established on the

west coast. Although their combined nameplate capacity is 30 Mtpa on paper, there are

complications, particularly at Dabhol and Kochi terminals, that limit the amount of LNG that India can

actually receive.

– Dabhol (5 mmtpa) lacks a breakwater facility, and has to shut down during the monsoon season

(July‐September).

– Kochi (5 mmtpa) lacks evacuation pipelines, and has a utilization rate of under 10%.

The LNG effective import capacity needs to expand rapidly. The completion of new projects that are

currently under construction on the eastern and western coasts, including the Mundra (5 mmtpa),

Ennore (5 mmtpa) onshore LNG terminals and H‐Energy’s Jaigarh FSRU, will play a critical role as

Indian LNG demand is poised for significant growth in the next years. Operations are also under way

at existing facilities to enhance their output. The completion of a breakwater project at Dabhol, along

with pipeline connection at Kochi, will see these terminals operate at full capacity.

India’s nominal regasification capacity is expected to double to around 60 Mtpa in the next four

years (Table 7).

TABLE 6: PROSPECTS FOR GAS SUPPLY IN INDIA (BCM)

Production LNG imports Pipeline imports Consumption

%Import Dependence

2016 30 25 55 45%

2017 32 27 58 46%

2018 (F) 31 31 62 50%

2020 34 37 71 52%

2025 40 48 88 55%

2040 75 90 10 175 57%


TABLE 7: PROSPECTS FOR LNG INFRASTRUCTURE DEVELOPMENTS IN INDIA

Existing State Capacity (Mtpa)

Coast

Dahej Gujarat 15 West

Hazira Gujarat 5 West

Dabhol Maharashtra 5 West

Kochi Kerala 5 West

Under construction State Capacity Coast Start‐up date

Mundra Gujarat 5 West 2019

Jaigarh LNG Maharashtra 4 West 2019

Ennore ‐ Phase 1 Tamil Nadu 5 East 2019

Digha ‐ FSRU Odisha 3 East 2020

Dahej ‐ Phase 3 Gujarat 2.5 West 2020

Jafrabat Gujarat 5 West 2021

Dhamra Odisha 5 East 2021




2.5. The expansion of infrastructure is a key enabler for natural gas expansion

Along with the increase in LNG import capacity, the expansion of the pipeline network is essential to

provide the country wide access to gas.

India’s gas pipeline infrastructure is relatively under‐developed. In 2016, the country onshore

pipeline network totalled over 16,065 km and had a total capacity of around 140 bcm/year. As of

September 2016, average pipeline capacity utilisation was only 40%. Pipeline distribution is uneven

across the country, which shows strong regional imbalances, as it is concentrated in the north and

west. Around 40% of pipeline infrastructure is concentrated in two western states (Gujarat and

Maharashtra). Five north‐eastern states, and the eastern, southern and central regions have limited

to no pipeline infrastructure.

In comparison, India’s gas reserves are largely concentrated in the eastern and western offshore

basins. Pipeline projects under construction have faced delays due to the difficulty in anchoring final

customers, problems in the process of land acquisition, financing concerns and a lack of clarity

around the downstream regulatory framework. Insufficient pipeline infrastructure and some

underutilized parts of the network have been key obstacles to the Indian gas market development.

The lack of an integrated national system is a major constraint on gas market development.

Therefore, new infrastructure investment will be crucial for the expansion of gas markets in India.

Prospects for natural gas demand in India is closely connected to integrated infrastructure planning,

and regulation at national level on network access, as the development of downstream

infrastructure is coupled with import facilities. Coastal areas and industrial centers that can be

connected to LNG reception terminals constitute the cornerstone of India’s gas market expansion.

FIGURE 21: INDIA’S NATURAL GAS FIELDS AND INFRASTRUCTURE

Source: CSR (2017)

In order to develop gas grid infrastructure across the country, about 15000 km long additional

pipeline network have been identified. Out of the envisaged 15000 km additional gas pipeline,

PNGRB/GoI has already authorized entities to construct about 14500 km long pipelines and same is



under development. This will predominantly comprise of interstate pipeline network. Additional

investments are also expected to be made in intra state and distribution pipelines.

GAIL plans to integrate pipelines in southern India with the pipeline systems in the northwest of the

country. Construction of pipelines such as Jagdishpur‐Haldia and the long delayed Kochi‐Mangaluru‐

Bengaluru will connect industrial belts in east and south India to the national grid. Cedigaz also

expects the Kochi pipeline and Haldia pipeline to be completed between 2020 and 2025.

Additionally, H‐Energy’s planned 635 km Jaigarh‐Mangaluru pipeline and IOC’s planned 1,175 km

pipeline connecting its Ennore LNG terminal offer further upside to LNG demand growth in industries

in the south.

The Ministry of Petroleum and Natural Gas estimates close to $136 Billion investments in the Indian

gas sector by 2025, a large part of which includes expansion of infrastructures, LNG terminals,

pipeline projects etc.‐and expansion of City Gas Distribution network. The government’s push toward

a gas‐based economy has given significant thrust to LNG imports, which in turn will inevitably lead to

significant investment towards infrastructure development. A clear and appropriate regulatory

framework is essential to facilitate midstream and downstream investment.

Prospects for international pipeline import projects

In Cedigaz Scenario, pipeline imports from Turkmenistan and Iran will be delayed and only

commissioned between 2025 and 2030. Deliveries will progressively ramp‐up afterwards. Political

and security risks are complicating pipeline import project plans. Economic and commercial

challenges must also be overcome before becoming a viable option for India.

Turkmenistan is supporting the TAPI pipeline project. As its exports to Russia and Iran have shrunk to

almost zero, Asia has become its main strategic outlet. In May 2012, a gas sale and purchase

agreement was signed between GAIL and TurkmenGas for gas deliveries through this project. The

TAPI project faces major geopolitical headwinds, including Afghan security problems and transit

through Pakistan. The national company Turkmengas – which is overseeing construction of the

Turkmen section – claims to be making progress laying its own stretch, but construction has yet to

start outside the country.

The energy crisis between India and Pakistan seems to have lowered and hopes for a beneficial

peace process are more likely on the horizon than in the past, all the more than these two countries

have economic gains to share. Therefore, the India‐Pakistan regional politics is not the main hurdle

surrounding the advancement of the Iran‐Pakistan‐India (IPI) project. The IPI challenges now focus on

the political relations between the US, Iran, India and Pakistan. Therefore, the IPI pipeline political

hurdles considerably complicate the advancement of the project. A subsea Iran‐India pipeline

avoiding Pakistan is being seen as an alternative to the onland Iran‐Pakistan‐India pipeline. Iran and

India are studying a 1,400 km offshore pipeline that would take natural gas from southern Iran via

Oman Sea and the Indian Ocean to Gujarat state.

While there are many physical options to import gas by pipeline, all these options encounter

economic and/or policial hurdles. Cedigaz therefore expects that the lion’s share of gas imports in

India will be via LNG tankers.

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