India's auto industry set for a CNG boom as gas infra inches to 100% penetration

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India's auto industry is about to see a big increase in the use of compressed natural gas (CNG) over the next three to four years. One of the reasons for this optimism is the infrastructure of the city gas distribution (CGD) network that has reached over 88 percent of the country's land mass. In terms of reach, it is equivalent to about 98 percent of the population, according to government statistics.

At the same time, the government has a goal to bump up the number of CNG stations from 6,000 to 17,700 by 2030. To further bolster this momentum, the government recently launched the 12th CGD bidding round in early October, aiming to bridge any remaining gaps in the gas infrastructure.

Where does it come from?
India obtains its CNG from a combination of sources. Some of it is produced within the country, while the rest is imported. Roughly 35-40 percent of the natural gas used for CNG production comes from domestic sources. The remaining is imported in the form of liquefied natural gas (LNG) from different countries.

For clarity, LNG, which is in a supercooled liquid state, is heated to convert it back into its natural gaseous form. The regasified (process of converting liquefied natural gas (LNG) at −162 °C (−260 °F) temperature back to natural gas at atmospheric temperature) natural gas is then compressed at a higher pressure, using specialised compressors, reducing its volume and making it suitable for storage and transportation as CNG.

The country is also exploring other ways to produce CNG. For example, there are special plants called bio-CNG plants that create renewable CNG from agricultural waste. These plants help produce CNG in an environmentally friendly manner.

India produced about 34,450 million standard cubic metres (MMSCM) of natural gas during the fiscal year 2022–2023, according to data released by the Ministry of Petroleum and Natural Gas. However, the total consumption of natural gas in the country was much higher, reaching about 60,311 MMSCM during the same period. To meet the demand, India imported approximately 26,647 MMSCM of LNG from other countries. The import bills for LNG amounted to around US$ 17.9 billion during that time.

Distribution costs
From the automotive industry's perspective, CGD networks are an interconnected system of underground natural gas pipelines for supplying natural gas to retail outlets situated in a specified city or district, where it is further compressed before being filled into vehicles as CNG for motorists. Specialised container trucks are also used for ferrying the gas to retail stations which are in interiors and yet not covered with pipeline connectivity. Pipelines provide the cheapest method of transportation, as the next best coastal method is 46 percent costlier, while roadways are even twice as costly.

This development holds particular significance for the automotive industry's transition to CNG-fuelled vehicles. It addresses a key concern for potential CNG vehicle owners: the availability of refuelling infrastructure. The establishment of more fuelling stations will encourage individuals and businesses to opt for CNG vehicles, knowing that convenient refuelling options will be readily available.

Cost of CNG vs fossil fuel imports
CNG is a much cleaner fuel in comparison to petrol or diesel and hence offers a compelling alternative fuel option. This aspect should also be seen in context of the country's fossil fuel import bills which are projected to exceed Rs 25 lakh crore within the next five years, a significant increase from the current Rs 16 lakh crore.

During the launch of the 12th CGD bidding round in Delhi, Hardeep Singh Puri, Minister of Petroleum and Natural Gas, said, "At present, about 23,500 km of gas pipeline network is under operation in the country, and around 12,000 km of pipeline is approved or under construction."

Delivering gas via pipelines is also gaining momentum and helping bring down transportation costs.  

The latest development aims to extend the CGD network to seven geographic areas in 92 districts, encompassing five states and two union territories. Notably, these regions include the states of Arunachal Pradesh, Meghalaya, Manipur, Nagaland, and Sikkim, along with the union territories of Jammu and Kashmir and Ladakh, he added. 

Dr. Anil Kumar Jain, Chairperson, Petroleum and Natural Gas Regulatory Board (PNGRB), said that the current focus of PNGRB is to create a vibrant and sustainable gas infrastructure in the entire country. "The launch of this bidding round for the Himalayan States is a step towards providing cleaner fuel in the fragile ecosystem of these states (and UTs)." The last date for submission of bids is January 11, 2024, and PNGRB intends to finalise the awards by March 2024.

PNGRB pointed out in a statement that after the completion of the 12th CGD bidding round, almost the entire country, except Mizoram (as the election date was announced on October 9, 2023), and Andaman, Nicobar Islands, and Lakshadweep, will be covered under the CGD network. This amounts to a giant leap towards improving the share of natural gas in the country’s energy mix. India’s current share of gas in the energy mix stands at 5.78 percent, which is slated to increase to 15 percent by 2030, thereby creating a gas based economy, it added.

PNGRB is mandated to authorise entities to lay, build, operate, or expand city or local natural gas distribution networks (CGD networks), for which it calls for competitive bids from public sector units (PSUs), joint ventures (JVs), and private companies for the laying, building, operating, or expansion of CGD networks. The government provides cheap domestic gas to the CGD segment under the administered price mechanism (APM) for domestic PNG and CNG categories. However, liquefied natural gas (LNG) is imported to meet industrial and commercial PNG demand.

Price fluctuations failed to dampen CNG demand
By CY27, CNG powertrain penetration may reach 18 percent from 11 percent in 2022. While CNG-related infrastructure development continues to make strides, the volatility in gas prices has been viewed as a hurdle, which has been an impediment to its adoption. As per Care Edge ratings, the CNG prices have displayed a rising trend, with average annual prices in Mumbai growing at a CAGR of 17.1 percent over the FY19-FY23 period. While the slight decline in FY21 is attributed to the global demand collapse due to covid, the subsequent surge in prices in FY22 and FY23 is due to the restoration of demand with a bounceback in economic activities, increased household consumption, and a sharp uptick in the auto sector. The price rise in FY23 was sharp at 49 percent, reflecting the surge in gas prices globally on account of supply disruptions caused by the ongoing Russia-Ukraine war.

The sharp increase in CNG prices was initially expected to dampen the demand for CNG vehicles in FY23. On the contrary, retail sales of CNG passenger vehicles increased by 40.7 percent in the year, with most other categories
also displaying a large jump in demand. The dip in demand for CNG goods vehicles in FY23 is attributed to many last-mile delivery operators switching over to electric light commercial vehicles (LCVs), which provide the benefit of even lower operating costs vis-à-vis CNG, the CARE Edge report adds.

Rohan Kanwar Gupta, Vice President and Sector Head of Corporate Ratings at ICRA Limited, offers a perspective.  He said that the fiscal year 2023 witnessed a significant surge in CNG prices and the rise in natural gas prices was the main factor driving this surge. Additionally, factors such as an increase in blending costs and the depreciation of the Indian rupee also contributed to several price hikes. The escalating gas prices had a negative impact on the adoption of CNG powertrains in the second half of the calendar year 2022. This decline was due to a narrowing running cost difference between petrol and CNG powertrains, resulting in an extended payback period for CNG powertrains.

Government intervention to make CNG more attractive
The Cabinet Committee on Economic Affairs (CCEA) took note of the existing challenges and addressed them by approving a new domestic natural gas pricing plan on April 6, 2023. Under this plan, the price of domestic gas is determined to be 10 percent of the monthly average of the Indian crude basket and is notified on a monthly basis. As a result of this revised structure, the cost of compressed natural gas (CNG) has decreased by up to 10 percent across various cities. Going forward, the plan also aims to restrict significant price increases by setting a ceiling price for gas produced from ONGC and OIL nomination blocks. The decline in CNG prices has not only contributed to a reduction in the overall cost of owning a powertrain but has also facilitated the wider adoption of CNG as a viable alternative.

The Kirit Parikh committee on fair pricing of natural gas had in 2022 recommended that the price from old fields be fixed at 10 percent of monthly average of country's crude basket. Further, it also recommended a floor price of US$ 4 per mbtu upto a ceiling of US$ 6 mbtu.

Gupta added that CNG fuelling infrastructure has been improving at a healthy pace across the country, with fuel availability in Tier 2 cities also improving. "The government set an aggressive target to ramp up the number of CNG fuelling stations across the country. Given the increasing popularity of CNG variants, leading OEMs have been increasing coverage of CNG across their product portfolio," Gupta informed Autocar Professional.

"The proportion of CNG, EVs, and hybrids is likely to materially increase as a proportion of new vehicle sales over the next 3-4 years, with CNG expected to emerge as the second most popular powertrain. ICRA estimates CNG powertrain penetration to increase to levels of 18 percent by CY2027, from 11 percent in CY2022," he continued.

Based on the most recent research from Nuvama, the low prices of CNG are expected to make it more competitive when compared to petrol and diesel. The new rates are 48 percent compared to gasoline and 33 percent compared to diesel, down from 46 percent and 30 percent, respectively, before the price cuts. This price decline is anticipated to drive increased demand for CNG, resulting in higher volumes and the realisation of economies of scale. It is worth noting that even in the worst-case scenario, CNG's competitiveness remains strong at 43 percent against petrol and 25 percent against diesel, the report adds.

EV scare for CGDs
Shares of City Gas Distribution (CGD) companies Indraprastha Gas (IGL) and Mahanagar Gas (MGL) dropped by up to 11 percent in the middle of October, after the Delhi government approved a policy for electric vehicles (EVs) used by ride-hailing services and delivery companies.

The Delhi government wants cab aggregators, delivery services, and e-commerce companies to transition to using electric vehicles. However, the policy is still waiting for approval from the Lieutenant Governor. The government aims to have 5 percent more EVs in the fleets of companies like Uber and Ola within the next six months. The policy also requires these companies to gradually increase the percentage of electric vehicles they purchase, with 50 percent being electric within three years and 100 percent within five years from the notification date. By April 1, 2030, all aggregators must have a fleet that consists solely of EVs.

Some analysts believe that EVs are not a major threat to compressed natural gas (CNG) in many parts of the country, including in Maharashtra, which boasts the country's financial capital, Mumbai. Additionally, the Maharashtra government has decided to switch back to CNG buses from electric buses due to the high cost of EVs, long charging times, and limited infrastructure. The Maharashtra State Road Transport Corporation (MSRTC) plans to add 80 CNG buses every month until the end of the fiscal year 2024, which will bring the total to 500 buses in MGL Gas. The CGD companies are also realigning current sourcing contracts, launching targeted schemes for retrofitting CNG kits, providing fuel cards on the purchase of CNG vehicles, and establishing tie-ups with OEMs to boost growth.

Capex lined up
In FY24, Mahanagar Gas, which operates in Mumbai and surrounding districts, is targeting around Rs 600-800 crore, depending on the availability of sites for the construction of the CNG stations and permissions for laying pipelines, among others. Likewise, Delhi-based Indraprastha Gas has planned a capex of Rs 1,500 crore in FY24 for infrastructure development, including the existing Delhi/NCR region. Gujarat Gas is looking to spend capex from Rs 1,000 to Rs 1,200 crore for the next three years.

This feature was first published in Autocar Professional's November 1, 2023 issue.