The Future of Natural Gas in China and India – 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.

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 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. The main natural gas demand drivers in these two markets will be the economic expansion, the urbanization, as well as energy and environmental policies. A major 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.

Source: Cedigaz Outlook (2018)

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 and transportation in a longer term perspective.

Prospects for China’s gas demand by sector (bcm)

Source: Cedigaz Outlook (2018)

Prospects for India’s gas demand by sector (bcm)

Source: Cedigaz Outlook (2018)

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.

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.

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.

Prospects for international LNG imports (bcm) – Role of China & India

Source: Cedigaz

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. 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.

Armelle Lecarpentier – Chief Economist at Cedigaz

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Cedigaz (International Center for Natural Gas Information) is an international association with members all over the world, created in 1961 by a group of international gas companies and IFP Energies nouvelles (IFPEN). Dedicated to natural gas information, CEDIGAZ collects and analyses worldwide economic information on natural gas, LNG and unconventional gas in an exhaustive and critical way.