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Automobiles: The Prospects of CNG Cylinders in India

Updated on January 31, 2015
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The Current Scenario

The growth of on-the-board CNG cylinders in India depends directly upon the adoption of Compressed Natural Gas as a vehicle fuel (Details: Currently, the off-take of natural gas as automobile fuel is very low with major­ity going to electricity production and industrial use. Also, the shortage of natural gas supply and weak Government policies are discouraging the develop­ment of robust gas distribution system for automobiles. Apart from the availability of natural gas, pricing fac­tors affect the adoption of CNG vehicles. Economy on account of lower running costs should be sufficient to set-off the initial expenditure on CNG kits (conversion, retrofitting, or purchase of OEM models) and offer additional savings over the life of the kit.

The Opportunity

While the near-term industry scenario indicates weakness, several reasons explain why the medium to long-term prospects are stronger, especially for the new players. Firstly, the current outlook by the Ministry of Petroleum does not take into account the possibility of augmenting the supply with alternative sources of production, such as shale gas, tight gas, coal bed methane, and gas hydrates. Certain regions in the Indian terrain are believed to be rich in shale reserves, though the policy framework is not yet in place. Secondly, the Indian policy makers are exploring various options and trying to negotiate more reasonable terms for LNG imports with multiple nations. Once the long-term arrangements are in place, better pricing regime will come into existence and favorably impact the domestic prices. Thirdly, India has joined hands with Japan (third-largest importer) to control the spiraling costs of import in Asia.

In addition, research to find viable methods to extract large amounts of natural gas from biomass leftovers and other organic byproducts is progressing on a global level. It is expected to begin manifesting its results in the long-term.

The Policies and Action

Shale gas exploration requires specific technical knowhow and infrastructure, which is developing slower than expected due to laggard Government action. On the other hand, India is considering proposals on stake in overseas gas reserves.

To lower the costs of LNG imports, the India is considering migrating from spot buying system to long-term contracts with certain gas exporting nations. Exploration of domestic reserves, new discov­ery, and alternative sources are also expected to check the upward trend in gas prices.

The stringent regulatory framework, uncertain Government policies, and lack of incentives for pro­duction of natural gas & CNG cylinders, distribution of gas, and migration to natural gas vehicles have impacted the market negatively. Therefore, streamlining of these aspects will provide boost to the acceptance of gas as fuel.

The Need

A multi-pronged strategy is required to boost the supply of natural gas in India, including increased imports and exploration of alternative means of production, such as shale gas and organic sources. India is yet to test the potential of its unconventional resources to supplement the domestic supply. Fiscal incentives for adoption of CNG as a fuel are needed both at the central and state levels. In addition, considering the contribution of the automobile sector in the total oil imports the Government should allow greater portion of gas availability to this sector.

The Way Forward

Over the medium term, changes in the demograph­ics, rising incomes, and increase in the proportion of youths will be positive for the industry. Higher dispos­able incomes and more dynamic consumer behavior patterns are expected to alter the choice of automobile fuel in future.

The country faces its General Elections in 2014 and a change in regime may have a bearing on the relevant policies. Any initiatives towards improving the natural gas situation in the country and incentives (exist­ing and potential new) for adoption of CNG as fuel will begin manifesting results in the medium-to-long term. Therefore, despite the chal­lenges in the short-term, the long-term outlook for the industry is positive.

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