India’s LNG Ambition: Can Infrastructure Expansion Overcome Price and Policy Hurdles?

India’s LNG Ambition: Can Infrastructure Expansion Overcome Price and Policy Hurdles? 

India’s ambitious push to become a gas-based economy is facing a critical test. Despite plans to significantly boost liquefied natural gas (LNG) import capacity, the country’s energy transition is caught between soaring infrastructure investments and harsh market realities. While new terminals promise energy security, a web of pricing pressures, underutilized assets, and rigid demand structures threatens to undermine its goal of raising natural gas’s share in the primary energy mix to 15% by 2030 . 

The Infrastructure Expansion: Building for a Future of Uncertainty 

The government’s vision is clear: increase LNG import capacity from 52.7 million tonnes per year to 66.7 million tonnes per year by 2030 . This expansion is already underway with a series of major projects: 

• Petronet LNG, the country’s largest importer, is expanding its flagship Dahej terminal by 5 million tonnes per year, aiming for completion by March 2026. It is also building a new 4-5 million tonnes per year terminal in Gopalpur, expected by 2028 . 

• GAIL’s Dabhol terminal is set to double its capacity by 2030 . 

• Private players like H-Energy and Swan Energy are bringing Floating Storage Regasification Units (FSRUs) online, offering faster deployment and flexibility. H-Energy recently commissioned a 4 million tonnes per year FSRU at Jaigarh, Maharashtra . 

This expansion is strategically vital. As one of the world’s largest energy consumers, India seeks to diversify its imports amid global volatility. FSRUs, which can be deployed in 1-3 years versus 4-6 years for land-based terminals, are seen as a crucial tool for rapid, flexible capacity addition . However, this building spree overlooks a pressing issue: existing terminals are running far below their potential. 

The Utilization Paradox: Plenty of Capacity, Little Uptake 

Beneath the headlines of new projects lies an uncomfortable truth. While the Dahej terminal operates at over 90% capacity, most other Indian LNG import facilities are severely underutilized, running at an average of 20-30% . This stark disparity reveals a critical bottleneck not in import capacity, but in last-mile connectivity and market development. 

Table: Utilization rates of major Indian LNG terminals highlight the severe underuse of capacity beyond the Dahej facility . 

The problem is threefold: 

1. Pipeline Gaps: A lack of connecting pipelines from terminals like Kochi to major demand centers leaves them stranded. 

1. Market Fragmentation: Downstream markets in many regions are underdeveloped, with limited numbers of industrial or city gas customers to absorb the regasified LNG. 

1. Price Sensitivity: For the sectors that could use more gas, the cost is often prohibitive. 

This underutilization represents billions of dollars of stranded capital and underscores that building terminals is only the first step. Creating demand and ensuring affordable supply are far greater challenges. 

The Price Trap: A Costly Diversification Strategy 

In a bid to secure supply and diversify away from oil-linked contracts, Indian firms like IOC, HPCL, and BPCL signed mid-term LNG deals indexed to the US Henry Hub benchmark . This strategy has backfired. With rising US demand and a weakening Indian rupee, these contracts have become unexpectedly expensive. 

In 2026, LNG from Henry Hub-linked contracts is expected to cost city gas firms around $13.40 per million British thermal units (MMBtu). This is staggeringly higher than: 

• Domestic gas from conventional fields ($6.55/MMBtu) 

• Crude-linked LNG imports ($8.80/MMBtu) 

• Even the current spot market price (~$11.90/MMBtu) . 

Major city gas distributors like Indraprastha Gas (IGL) and Mahanagar Gas, which shifted up to 30% of their portfolio to Henry Hub indexation, now warn of severe margin pressure . This places them in a difficult position: either absorb the losses or pass on higher costs to consumers, which would further suppress demand. 

The situation exposes a critical flaw in India’s gas strategy. The pursuit of supply security through term contracts has locked in high costs just as the global market is entering a “structurally softer phase.” Analysts from the Oxford Institute for Energy Studies project a shift toward a more durable period of $6/MMBtu LNG by the late 2020s, driven by a wave of new supply from the US, Qatar, and Africa . India’s current portfolio, heavy on expensive term deals, may limit its ability to capitalize on cheaper spot cargoes in the coming years. 

Demand Dilemma: Identifying the Truly “Switchable” Sectors 

The expectation that cheaper gas will automatically fuel a demand boom is flawed. India’s gas demand is highly sector-specific and structurally constrained. 

• Industry: The Bright Spot (with Caveats): Industrial clusters in Gujarat or Maharashtra, which switched from gas to propane or fuel oil during price spikes, are the most responsive. A drop to a $6/MMBtu price environment could trigger a swift return to gas for heat-intensive processes in ceramics, glass, and textiles . However, this depends entirely on price pass-through and last-mile pipeline availability. 

• City Gas Distribution: A Mixed Bag: Demand from commercial establishments and transport (CNG) can be elastic if lower costs reach the end-user. However, the domestic household segment grows slowly due to the time and capital required for network rollout . 

• Power Generation: Episodic at Best: Gas-fired power plants, which operate at very low capacity, are not competitive with coal. They may see short-term dispatch during peak demand or coal shortages, but no sustained growth is expected . 

• Fertilizers: Insulated and Inelastic: As a priority sector, fertilizer production receives subsidized domestic gas under the Administered Price Mechanism (APM). It offers almost no short-term elasticity for LNG demand, regardless of price . 

Thus, the potential “demand boom” is confined to specific, price-sensitive industrial and commercial pockets, bounded by infrastructure and policy. 

Navigating the Path Forward 

To transform its gas infrastructure from an underutilized asset into the backbone of a cleaner energy system, India must address multiple fronts simultaneously: 

• Accelerate Last-Mile Pipeline Expansion: The government’s gas grid plan must be executed with urgency. Terminals like Kochi will remain white elephants without pipelines to connect them to markets. 

• Reform Gas Allocation and Pricing: The current system, which insulates priority sectors with cheap APM gas, distorts the market. A more transparent and market-oriented pricing mechanism would encourage efficient consumption across all sectors. 

• Adopt Agile Procurement: While long-term contracts provide supply security, India must balance its portfolio with greater access to the spot market to capture lower prices as new global supply floods the market from 2026 onward . 

• Leverage FSRU Flexibility: The inherent mobility of FSRUs should be used strategically—to serve emerging industrial corridors, address regional shortages, or act as stop-gap solutions while permanent infrastructure is built. 

Conclusion: Building Bridges to a Market That Must Be Created 

India’s LNG terminal expansion is a necessary bet on a lower-carbon future and enhanced energy security. However, the current trajectory risks creating a surplus of expensive, underused infrastructure. The nation is building vast bridges for gas to flow, but on the other side, the market is fragmented, price-sensitive, and hampered by policy. 

The real challenge for India is not just constructing regasification capacity, but orchestrating a holistic market reform. This involves synchronizing pipeline development, rationalizing subsidies, enabling competitive pricing, and crafting a nimble import strategy. Without this integrated approach, the grand vision of a gas-based economy may remain just that—a vision—with billions of dollars of infrastructure standing as monuments to ambition, awaiting demand that may never fully materialize.