The disruption in global natural gas markets has highlighted the vulnerability of energy supply chains to geopolitical shocks. The conflict in West Asia has significantly impacted global liquefied natural gas (LNG) trade, triggering sharp price increases and raising concerns among major importing nations, including India. Roughly 20 per cent of globally traded LNG originates from Qatar and the UAE, with exports from both countries heavily dependent on the Strait of Hormuz. Several facilities have experienced operational interruptions, creating ripple effects across international gas markets and exposing structural vulnerabilities in energy-importing economies.
At a time when India is positioning natural gas as a critical transition fuel in its clean energy journey, the crisis presents both immediate challenges and longer-term strategic problems related to energy security, infrastructure resilience and supply diversification.
The supply crisis
The most immediate challenge stems from India’s growing dependence on imported LNG. Despite being one of the world’s fastest growing economies, India’s natural gas consumption declined by around 2 per cent during 2025-26 (as of February 2026). Growth was concentrated largely in the city gas distribution (CGD) segment, which expanded by 9 per cent during the period under consideration. CGD accounted for nearly 23 per cent of the country’s gas consumption in 2025-26, second only to the fertiliser sector, which consumes around 29 per cent. Despite the policy towards building a gas-based economy, domestic gas production has remained relatively stagnant over recent years. While output is expected to improve modestly during 2026-27 through new production from Oil and Natural Gas Corporation (ONGC)-operated assets in the Krishna-Godavari (KG) basin, project commissioning delays continue to constrain supply growth.
Meanwhile, LNG accounted for nearly 52 per cent of India’s total gas consumption during 2025-26 (till February 2026). This dependence has become one of the sector’s most significant vulnerabilities. The risk became even more pronounced when examining India’s LNG sourcing profile. Nearly 54 per cent of LNG imports during 2025-26 originated from the Middle East, excluding Oman. With the Strait of Hormuz emerging as a critical geopolitical bottleneck, supply disruptions have highlighted the concentration risk embedded in India’s sourcing strategy.
Several key sectors remain heavily dependent on LNG imports. Fertiliser manufacturers source nearly 85 per cent of their gas requirements through LNG. Industrial manufacturing, refineries and petrochemical facilities also maintain significant import exposure. Meanwhile, CGD entities derive around 38 per cent of their gas supplies from LNG.
Under the current supply-constrained environment, gas consumption across multiple sectors is expected to decline by 15-25 per cent during 2026-27. Industrial users and power generators are likely to bear the brunt of the impact, while fertiliser demand may remain relatively insulated due to the government’s priority gas allocation framework.
Another major structural challenge is India’s limited gas storage capacity. Unlike Europe and Japan, which maintain strategic reserves equivalent to roughly 55 days and 36 days of demand respectively, India lacks large-scale underground natural gas storage infrastructure. Existing LNG terminal storage facilities are designed primarily for operational requirements rather than long-term strategic reserves. This limited buffer creates significant risks during periods of supply disruption, particularly for sectors with relatively inflexible demand patterns such as fertilisers, compressed natural gas (CNG) transportation and residential piped natural gas (PNG) consumers.
Infrastructure bottlenecks continue to present additional challenges. Nearly 90 geographical areas (GAs) remain disconnected from the national trunk pipeline network despite approximately 300 GAs being awarded for development. Delays in obtaining local approvals, social activism-related disruptions, shortages of skilled manpower and non-uniform taxation across states further complicate network expansion efforts. Moreover, the lack of seamless third-party access to pipeline infrastructure remains a constraint on market development and competition within the sector.
Emerging demand drivers
Despite these challenges, several emerging opportunities could strengthen India’s gas sector. One of the most significant growth drivers is the CGD sector. Data from 2025-26 shows that nearly 63 per cent of gas consumed by CGD networks is used for compressed natural gas (CNG) production, compared to approximately 47 per cent in 2021-22. CNG remains extremely competitive against conventional automotive fuels, which are heavily taxed. On a total cost of ownership basis, CNG remains approximately 22-25 per cent cheaper than many electric vehicle (EV) alternatives. This cost advantage has supported continued adoption among commercial fleets and urban transport operators. Government prioritisation has also played a crucial role. CNG and residential PNG consumers continue to receive preferential gas allocation, ensuring supply stability even during periods of market disruption. However, industrial and commercial PNG customers have experienced reduced allocations. Against notified expectations of roughly 80 per cent, actual supplies have fallen closer to 65 per cent, creating pressure on industrial consumers.
Perhaps the most significant structural trend emerging in the sector is the rapid expansion of PNG household connections. Annual PNG additions are expected to rise from the current pace of around 2 million connections to approximately 7.5 million per year. At this rate, nearly 30 million new PNG connections could be added by 2030. As a result, the total number of domestic PNG connections is expected to rise from the current 16 million to over 45 million by 2030. This expansion could displace nearly 10 per cent of LPG consumption while creating a substantially larger customer base for CGD companies.
The acceleration of CGD expansion has also been supported by streamlined approval mechanisms. Municipal bodies and public works departments have been directed to grant permissions for laying pipelines within one day, with delayed approvals increasingly treated as deemed approvals.
The implementation of the unified tariff regime from January 2026 represents another positive development. The framework allows a portion of CNG and domestic PNG supplies to continue attracting lower Zone 1 transportation tariffs regardless of location. This benefits operators across the country, particularly those located in northern India, by reducing transportation cost disparities.
Future gas market
Several long-term trends are reshaping the future direction of India’s gas ecosystem. One important trend is the growing use of digital technologies across the gas value chain. The current crisis has underscored the importance of real-time supply chain visibility, predictive demand management and digital monitoring systems. Government agencies and regulators are increasingly relying on sophisticated data-driven platforms to monitor supply disruptions, allocation priorities and consumption patterns. Similarly, CGD companies are deploying digital asset management systems, remote monitoring technologies and predictive maintenance tools to improve operational efficiency and reliability.
Another emerging trend is the rise of small-scale LNG solutions as many GAs remain disconnected from trunk pipeline infrastructure. Small-scale LNG solutions provide a less capital-intensive alternative, allowing gas companies to serve remote markets while larger pipeline networks are being developed.
Renewable gases are also gaining attention, although adoption has been slower than expected. Compressed biogas (CBG) production falls short of expectations despite strong policy support. As a result, achieving the 5 per cent blending target appears ambitious. This is largely due to several structural impediments within the CBG ecosystem, including procurement prices that remain insufficiently remunerative for producers.
Hydrogen represents another important long-term opportunity. While technical studies indicate that hydrogen blending levels of up to 18 per cent may be feasible under certain conditions, commercial deployment remains at an early stage. Pilot projects undertaken by major energy companies have demonstrated technical viability, but utility-scale implementation will require substantial investment, regulatory clarity and infrastructure adaptation.
At the same time, the sector faces growing competition from electrification. The rapid rise of electric mobility represents one of the most significant long-term risks to transportation-related gas demand. Global examples, particularly China, illustrate how quickly electric and hybrid vehicles can gain market share when supported by favourable policy frameworks, declining battery costs and extensive charging infrastructure. Although India remains at an earlier stage of EV adoption, government support for electric buses, public transportation electrification and fleet electrification among cab aggregators could gradually reduce demand growth for CNG in urban transportation markets. As decarbonisation efforts accelerate, natural gas may increasingly be viewed as a transition fuel rather than a permanent destination fuel, requiring companies to continuously adapt their long-term business models.
Moving ahead
India’s natural gas sector is entering a period of significant transition. Geopolitical disruptions have exposed the vulnerabilities associated with high LNG import dependence, concentrated sourcing patterns and inadequate storage infrastructure. CGD volumes are expected to moderate by 5-10 per cent in 2026-27 due to limited LNG availability. Industrial and commercial customers have traditionally relied on alternatives such as propane. However, the limited availability of these fuels owing to their dependence on Middle Eastern supplies could drive greater adoption of CGD.
Despite these challenges, CGD capital expenditure plans remain largely intact and may even increase, supported by government initiatives and stricter regulatory oversight. Annual capex of Rs 50 billion-Rs 70 billion is expected over the next three years, driven by continued network expansion and a faster roll-out of new PNG connections. The sector outlook remains stable, supported by government efforts to ensure adequate PNG and CNG supply. In addition, the pricing power enjoyed by incumbent players is expected to help sustain healthy profitability.
Based on remarks by an ICRA representative at a recent India Infrastructure conference.
