MUMBAI, June 22: Indian energy firms are stepping up spending on compressed natural gas (CNG) infrastructure to meet soaring demand from vehicle makers, but poor facilities may hamper gas adoption in the near term, analysts say.

India ranks fifth in the world for vehicles running on CNG, which is half the price of petrol or diesel.

But CNG is offered at only about one per cent of India's 35,000 retail outlets, in sharp contrast to neighbouring Pakistan where CNG is widely used and on offer at nearly 1,400 gas stations.

However, its demand along with piped gas in households is forecast to more than treble to 7 per cent of total gas demand in the next five years, according to KPMG.

India's third-largest car maker Tata Motors Ltd. has introduced a CNG model and even luxury car maker DaimlerChrysler is looking to get into the segment.

“The actual problem right now is that CNG availability is restricted to cities,” said Dilip Chenoy, director general of the Society of Indian Automobile Manufacturers. “But as the spread of CNG infrastructure increases, perhaps the shift to CNG variant vehicles will be imminent,” he said.

Leading energy firms are pouring money into gas distribution across India with state-run gas transporters GAIL (India) Ltd. and top private firm Reliance Industries Ltd pledging nearly $7 billion each to set up gas infrastructure, including city gas distribution projects such as CNG outlets.

Smaller gas transporters such as UK-based BG Group's Gujarat Gas Co. Ltd, Indraprastha Gas Ltd, Mahanagar Gas Ltd and Adani Energy Ltd have also lined up multi-million dollar investment to sell natural gas across India.

But this infrastructure may take up to five years to be operational and as a result CNG penetration is slow to catch on.

“We have to accept that availability of natural gas is localised right now and is a bit of a problem,” said Bhashit Dholakia, general manager at Adani Energy. “But things will improve once new pipelines are set up and projects by companies like Reliance start taking shape.”

India, Asia's third-largest oil consumer, imports 70 per cent of its oil and is encouraging use of natural gas to lower pollution and cut its import bill as the booming economy boosts energy demand among its 1.1 billion people.

KPMG expects at least 30 cities to embrace CNG, which costs half the price petrol and diesel, compared to a handful of large cities and smaller towns in a few states at present.

The fuel is mainly used by public transport services such as three-wheeled auto rickshaws, taxis and buses, after environmental laws were introduced in recent years.

India produces 95 million standard cubic metres of gas per day (mmscmd), which the government expects to rise to more than 190 mmscmd by 2009 after a series of gas finds off the east coast come on stream.

Goldman Sachs estimates the share of natural gas in India's coal-dominated energy basket will double to 18 per cent by 2015 -- still less than Pakistan where natural gas is more than 50 per cent of the energy basket.

“We expect this will mainly come at the expense of oil, the share of which is likely to fall to 25pc from 30 per cent during the same period,” Goldman said.

Analysts say CNG fuels 2-3 percent of all cars sold now but they see this segment as the fastest-growing in terms of fuel options in India's rapidly expanding vehicle industry. Only eight in every 1,000 Indians currently own car.—Reuters