India’s energy sector: A moment to reset

This is a thought leadership report issued by S&P Global. This report does not constitute a rating action, neither was it discussed by a rating committee.

The current energy crisis should advance a more reliable and resilient energy system. Timelines for short-, medium- and long-term actions must align to make primary energy choices that benefit energy consumption across end users. Policymakers and regulators can accelerate the reform agenda, but the pace of change will be dictated by the Indian energy market’s dependence on global energy flows and supply chains.

The disruption in the Strait of Hormuz has triggered one of the biggest and most consequential energy shocks the global economy has ever experienced. It will have far-reaching and long-lasting consequences, and it could challenge India’s dual vision of becoming Viksit Bharat by 2047 and achieving net-zero emissions by 2070.

The 1973 Arab oil embargo disrupted 8% of global oil supply. Today, about 16% of global oil supply is unavailable to consumers, the majority of whom live in Asia. Supplies of LNG, LPG, jet fuel, diesel, naphtha, fertilizers, sulfur and helium have also been disrupted. Energy security and affordability are priorities for every government. In India, the crisis could be an opportunity to address tactical issues and remove roadblocks, helping the country achieve its longer-term economic growth and sustainability goals.

Dependence on global supply chains, and particularly on commodities passing through the Strait of Hormuz, is well established. The volume and timing of commodities now flowing through the Strait are unknown and depend on when and how the conflict ends, the security of transit and the stability of the agreement. Energy sources within borders are the most secure, and for India, this means greater reliance on coal and renewables for power generation.

India’s energy demand is forecast to double in the next 25 years, offering an opportunity to build cleaner, more efficient infrastructure. This can further improve energy security and affordability by reducing dependence on imports. However, geopolitics and energy will remain closely linked.

A country’s energy security often appears robust until its system is forced to respond in real time. The sudden disruption to flows through the Strait of Hormuz has demonstrated how quickly a tightly optimized, pragmatically positioned energy supply chain can be pushed into stress.

India has avoided a binary approach to energy. Over the past decade, the country has largely pursued downstream supply over upstream ownership across crude oil and natural gas. While regional peers, such as Thailand’s PTT Exploration and Production, which face declining domestic production or maturing oil and gas basins have resumed international expansion, India’s national oil companies (NOCs) have so far sat out of Internationalization 2.0. The benign price environment and muted price shock due to the Russia-Ukraine war bolstered the adoption of “buy the product” over “own the production” strategies, which assumed a lower-for-longer price environment for imported energy. This is a geoeconomic vulnerability that is only growing in scale as India’s economy expands and the volume of oil and gas imports increases.

In 2022, India indicated its upstream pain-point threshold and instituted a windfall tax on domestic oil production above $75/barrel, although this tax has been rescinded. Despite a stronger economy and smaller fiscal vulnerabilities, high oil prices — the Indian basket is at $115/barrel at the time of writing — are a challenge for India’s pursuit of affordable supply. A traditional import dependency of 70%-80% for crude oil and about 50% for gas allowed domestic sources to offset the high import bill, combined with demand destruction or supply alternatives where feasible. In 2026, Indian NOCs face production declines, with limited near-term growth. This, combined with limited upstream expansion, erodes their ability to leverage the price upside and limits their contribution to the government’s arsenal to fight the price shock. By 2030, according to S&P Global, India will face an import dependency of 94% for crude oil and 65% for natural gas. 

As India’s economic might rises, so too will the cost of supply disruption. In the near term, the least-bad economic option is partial demand destruction via the passage of price signals to end consumers. But what about the medium term?

Japan has an import dependency of 99%, and its supply diversification strategy involves supply deals and ownership of upstream stakes. While Japanese companies such as Inpex are exposed to the Strait of Hormuz chokepoint (with 45% of total production from the Middle East and a net present value exposure of $19 billion), these companies remain major buyers of upstream assets, combining financial returns with an overarching element of energy security.

India’s fossil fuel strategy targets growing domestic exploration and production and supplier diversification. This is a good foundation; however, the country also needs a diversified portfolio of upstream positions that deliver strategic value to India while accruing financial value for its NOCs. Indian NOCs need their own version of Internationalization 2.0.

Greater security and reliance on domestic energy are needed. India has helped customers transition from biomass to LPG, and from LPG to piped natural gas, and has propelled the power system to greater renewable capacity. Fossil fuel power generation fell for the first time in decades in 2025 as renewables displaced coal and gas due to high fuel costs. This multidimensional, cross-end-use sector transition will be prioritized, even accelerated, while fossil fuels, especially in the residential sector, provide resilience.

In the power sector, renewable capacity additions face curtailment of up to 51% due to increased costs and delays in transmission capacity buildup. Such challenges exist amid an investment push toward rooftop solar and the solarization of agriculture, nuclear energy and data centers. Indian data centers account for less than 2% of global data center capacity, but a recently announced tax holiday until 2047 will increase investment. This will boost demand for cleaner, more reliable power, building the case for energy storage and underutilized gas-based power capacity.

Needing deeper self-reliance and decarbonization will push the energy system to compress and collapse timelines between the 2047 advanced energy economy and a 2070 net-zero future. The fiscal year 2026–27 budget increased allocations to 800%-900% for coal gasification and battery energy storage systems amid advances for carbon capture utilization and green hydrogen ecosystems. Translating this requires projects to be scaled with a willingness and systemic ability to absorb the integration costs of technologies. Energy affordability will remain a key concern, and the system must be able to absorb upward price pressures.

The transition from LPG to cleaner piped natural gas has gained traction, with residential cooking fuel being prioritized during the current crisis, 350,000 new registrants for gas connections and new LPG connections temporarily halted.

A push toward a comprehensive energy storage market and supportive policies across battery energy and product-level storage for key industrial end users is required. Investment in storage for fuels including gas, which has supported residential demand, will add system-level reliability.

The Middle East war offers an unprecedented opportunity to complete and accelerate India’s energy reform agenda. There are five areas of immediate attention for the energy value chain and the full spectrum of policy, regulation and operations:

1. Supply security: Rapidly increase supply of secure domestic energy sources including oil and gas production, biofuels, biogas, renewables, geothermal and nuclear power.
2. Diversity of supply: Secure access to oil and gas supplies less affected by supply routes and geopolitics. Indian NOCs need their own version of Internationalization 2.0.
3. Flexibility for resilience: Energy resilience will rely on improving flexibility in contracts, refining configurations, expanding shipping access and enhancing demand response.
4. Deep upstream push: India’s “all-of-the-above” strategy must move further upstream, transitioning from a faith-in-supplier strategy to one that combines this with a stake-in-supplier strategy.
5. Comprehensive energy storage for reliability: Supportive policies across electrons and molecules are needed to boost reliability, especially for bulk end-use sectors in power, transport and industry.