India must fix gas market, pipelines to unlock LNG opportunity: IGU report

Expanding liquefied natural gas (LNG) import capacity alone will not be enough to drive India's long-term natural gas growth, with the country needing faster investment in pipeline infrastructure, gas distribution networks, gas-intensive industries and sweeping reforms to pricing and market design, according to a report by the International Gas Union (IGU).

While India has significantly increased its LNG regasification capacity in recent years, investment in transmission and distribution infrastructure has failed to keep pace, limiting the country's ability to expand gas consumption, the report said.

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It added that reforms to pricing mechanisms, market access and regulations will be critical if India is to sustain long-term growth in gas demand.

The report comes against the backdrop of heightened concerns over India's energy security following disruptions to shipping through the Strait of Hormuz during the recent Iran conflict.

"The Strait of Hormuz crisis has underlined several import dependencies for India, particularly in gas supply chains. India's heavy reliance on Gulf-sourced LPGs and LNG, where Qatari exports are the primary source of supply, will bring into question India's historic reliance on close geographical suppliers that have proven to be vulnerable to disruption.

"These issues are not insignificant, and the current price shock will also, in the short term, upend the economics of imported gas for Indian power producers, industrial and domestic customers, for as long as it lasts."

India currently meets only about 50-52% of its natural gas demand through domestic production, with the remainder supplied through LNG imports, primarily from Qatar, Australia, the US and Russia.

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Its dependence is even greater in liquefied petroleum gas (LPG), with imports accounting for around 60-65% of domestic consumption despite India being among the world's largest LPG users.

A significant portion of these imports passes through the Strait of Hormuz, exposing the country to geopolitical disruptions.

However, the IGU believes the medium- to long-term outlook could improve if tensions in the Gulf subside.

A surge in new LNG export capacity expected over the remainder of the decade is likely to keep global LNG markets well supplied, putting downward pressure on prices and improving the economics of gas consumption in India. Permanent demand destruction in other Asian markets following the recent price spike could further accelerate declines in benchmark LNG prices, making gas more competitive.

To take advantage of potentially cheaper LNG, India will need to make its domestic gas market more flexible, the report said. It recommended further liberalisation of LNG terminal capacity bookings and system entry charges to improve market access and raise utilisation rates at import terminals.

The report also argued that gas will continue to struggle against coal unless pipeline connectivity expands substantially across the country.

"If gas is going to compete more effectively with coal, new transmission lines - underpinned by competitive transport tariffs - will be needed to provide reliable supply to the north, east and centre of the country where the gas network exists but is sparse."

It noted that inadequate pipeline utilisation in coal-dependent regions has kept delivered gas prices elevated, discouraging industrial consumers from switching fuels.

"Progress will require reforms to market design, regulation and pricing, as well as further liberalisation of terminal capacity bookings and system entry charges."

According to the report, lower international gas prices alone will not be enough to lift domestic consumption. Higher investment in infrastructure, improvements in commercial contracting and broader market reforms will be essential to expand the role of natural gas in India's energy mix.

The report also questioned India's existing wholesale gas pricing framework, arguing that meaningful investment will remain constrained without fundamental reforms.

India's gas pricing mechanism has undergone multiple revisions over the past decade, shifting from a regulated regime to hub-linked pricing in 2015 before moving to an oil-linked formula in 2022. While the latest mechanism helped moderate prices after the global energy crisis, domestic gas prices have remained above $7 per million British thermal units even though the earlier hub-linked formula would have resulted in lower prices, the report noted.

Although recent geopolitical tensions have raised concerns about India's dependence on LNG imports, the IGU said these risks can be reduced by diversifying import sources.

It added that any easing of shipping disruptions through the Strait of Hormuz, coupled with weaker LNG demand elsewhere in Asia, could quickly bring down global gas prices, creating an opportunity for India to accelerate gas adoption—provided it addresses longstanding infrastructure bottlenecks and market constraints.