IEA says India should free gas pricing; unbundle gas marketing, transportation biz

New Delhi: International Energy Agency (IEA) on Wednesday asked India to free up its pricing of natural gas and unbundling of marketing and transportation business to help increase usage of the fuel in the economy.

IEA in the India Gas Market Report: Outlook to 2030 projected the country's gas consumption rising by 60 per cent to 103 billion cubic metres (bcm) annually by the end of the decade.

As India targets raising the share of relatively cleaner natural gas in its energy basket to 15 per cent by 2030 from just above 6 per cent currently, IEA prescribed a set of policy reforms to usher in its greater use.

Pricing of gas, which is used to generate electricity, make fertilisers and turned into CNG to power automobiles and piped to household kitchens for cooking, is skewed. Gas from legacy fields of state-owned firms like ONGC and Oil India Ltd is currently capped at $6.5 per million British thermal unit while there are limits also imposed on fuel from difficult and high costing fields like deepsea.

"The anticipated easing of global gas market conditions in the latter half of the decade provides an opportunity for the government to implement full gas pricing freedom within the forecast horizon," IEA said.

Calling for transition to gas pricing freedom for all fields, the report said gradually extending gas pricing freedom to all fields, as recommended by the Kirit Parekh Committee in 2022, could stimulate greater investment in the upstream sector and improve the long-term availability of gas for India's consumers.

"A phased approach is advisable to protect consumers from price volatility during the transition. Initial measures could include lifting the price ceiling on deepwater and ultra-deepwater high pressure/high temperature projects and allowing upstream producers to sell a larger portion of their domestic production freely on the Indian Gas Exchange (IGX) than is currently permitted," it said.

IEA said international experience shows that the unbundling of supply and transmission activities and establishing independent gas transmission system operators (TSOs) are key prerequisites to a well-functioning gas market.

In India, state gas utility GAIL owns the majority of the pipelines transmitting gas. It is also the biggest seller of gas. This may create conflicts where the company may want to prioritise sale of its own gas over allowing third parties to access its pipeline network to sell their gas.

"Acknowledging India's unique challenges and the different market in which deregulation and unbundling took place in mature natural gas markets across Europe and North America, it is appropriate to plan for the unbundling of India's main transmission pipeline operators on an extended timescale," the Paris-based agency said.

"In the longer term, however, the legal separation of transport on the one hand and marketing and sales operations on the other hand could enhance market competition, increase flexibility, and improve infrastructure utilisation, ultimately supporting a greater role for gas in India's energy mix," it said.

Interim steps towards eventual unbundling could include the standardisation of gas sales agreements (GSAs) and gas transmission agreements (GTAs), which are currently not harmonised across India's main pipeline operators, and the strict enforcement of a code of conduct for the main operators to ensure an arms-length approach to capacity allocation, particularly to affiliated companies.

It also called for creation of an independent gas transmission system operator, saying a requirement of a well-functioning gas market is the creation of one or more independent transmission system operators, which can ensure that infrastructure access is provided fairly, transparently and in a non-discriminatory manner.

Other measures suggested included increasing transparency on available capacities and pipeline tariffs, promoting a transparent and efficient gas trading platform, ensuring effective, non-discriminatory third-party access to infrastructure, and levelling the playing field for gas across the economy.

"Adjusting the tax structure to support the use of gas as a transport fuel, similar to the favourable tax treatment for electric vehicles, could encourage its adoption and reduce emissions compared to diesel and gasoline vehicles," IEA said, adding, revising import duties on natural gas to align with those applied to crude oil and rationalising the GST on compressed natural gas (CNG) vehicles to reflect their lifecycle environmental advantages over diesel could further promote gas use in the transportation sector.

"These measures would enhance the competitiveness of natural gas and incentivise cleaner fuel use in India," it said.

The IEA report, released at the India Energy Week here, said India's gas market is at an inflection point as infrastructure expansion and policy support drive unprecedented growth in consumption.

Following over a decade of slow growth and periodic declines, India's natural gas demand increased by more than 10 per cent in both 2023 and 2024, indicating an inflection point.

While total gas consumption in 2023 was only marginally higher than 2011 levels, three key factors are now converging to drive substantial growth: rapid infrastructure expansion, recovering domestic production, and an expected easing of global gas market conditions.

"India's gas market is entering a new phase of growth, supported by significant infrastructure development and clear policy direction," said IEA Director of Energy Markets and Security Keisuke Sadamori. "The prospect of higher gas demand in India coincides with an expected wave of new global LNG supply. However, it will require careful planning and market coordination to ensure supply security and to help gas to compete in a price-sensitive market."

Infrastructure development is playing a crucial role in enabling market growth. Since 2019, India has almost quadrupled its number of compressed natural gas (CNG) stations and more than doubled the number of residential gas connections, while extending its transmission pipeline network by 40 per cent.

By 2030, the number of CNG stations and residential connections is expected to nearly double again, with the gas transmission grid expanding by an additional 50 per cent.

The city gas distribution sector is expected to lead consumption growth in India between now and 2030, supported by rapid CNG infrastructure expansion and competitive pricing against liquid fuels.

The heavy industry and manufacturing sectors are expected to add around 15 bcm of demand during this period, while gas use in oil refining is forecast to increase by more than 4 bcm as more refineries connect to the network.

India's domestic gas production, which met 50 per cent of demand in 2023, is projected to grow gradually, reaching just under 38 bcm by 2030. This would put it around 8 per cent above 2023 levels. The limited growth in domestic supply means India's LNG imports will need to more than double to around 65 bcm a year by 2030 to meet rising demand.

India is looking to increase the share of gas in its energy mix and the report identifies potential for even higher growth under an accelerated scenario, where targeted policy measures could push total demand to approximately 120 bcm by 2030, comparable to the current gas consumption of South America.

This scenario would require additional policy support to drive higher utilisation of gas-fired power plants, faster adoption of LNG in heavy-duty transport, and more rapid expansion of city gas infrastructure.

Looking ahead, the report emphasises the need for strategic planning in LNG procurement and import infrastructure. As legacy contracts expire, India faces a widening gap between contracted supply and projected demand after 2028, potentially increasing exposure to spot market volatility unless new long-term contracts are secured in the coming years.