LNG Uptake

Importers take advantage of easing prices

Gas is increasingly gaining share in India’s energy basket. Currently, the resource accounts for about 8 per cent of the country’s overall energy mix. About 40 per cent of the gas needs are met through imports, primarily in the form of liquefied natural gas (LNG). In the past decade, while India’s domestic natural gas production increased by 10 per cent, imports of LNG grew by 335 per cent. In recent years, this was significantly facilitated by falling crude prices.

Guzzling more gas: Surge in imports

At present, India is the fourth largest LNG consumer in the world, accounting for nearly 6 per cent of the global LNG market. The cumulative import of 4,224 million metric standard cubic metres (mmscm) for the first two months of the current fiscal year – April and May 2016 – was 44.4 per cent higher than the 2,925 mmscm imported in the corresponding period in 2015-16.

During the period 2011-12 to 2015-16, LNG consumption increased from 15 billion cubic metres (bcm) to 21 bcm. Besides, throughout the period under consideration, it increasingly replaced domestically produced gas, as reflected by its share in total gas consumption in the country. In 2011-12, about 27 per cent of the gas consumed in India was LNG, and its share increased to 46 per cent in 2015-16.

In fact, over the next four years, the country is expected to double its LNG imports. According to the Ministry of Petroleum and Natural Gas (MoPNG), there are plans to shift to a gas-based economy by boosting domestic production and buying cheap LNG in a bid to curb greenhouse gas emissions. Also, from the suppliers’ point of view, this makes sense – a closer market is of advantage to a seller. From Qatar, India’s largest supplier of LNG, it takes three days to ship LNG to the country, compared to the two weeks it takes to get it to other markets such as the UK (where prices are lower). Given these factors, India has emerged as a strong market for LNG suppliers. In fact, the country’s LNG needs are now competing with those of Europe, another major LNG consumer.

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Buyers’ power: LNG contract renegotiation

Declining LNG prices have rendered spot LNG contracts more attractive to importing companies such as Petronet LNG Limited (PLL). While spot LNG prices reached a low of $7-$8 per million metric British thermal units (mmBtu), long-term contracts with exporting companies such as RasGas offered the resource at nearly double the price. With spot prices of LNG mirroring the plunge in crude oil prices and falling below the contracted price, a number of PLL’s customers in the power, steel and fertiliser sector preferred to meet a part of their requirements from the global spot market. The formula that was earlier followed linked LNG prices to the 60-month moving average of the Japan Crude Cocktail. After renegotiations, it was linked to the three-month average of Brent crude, to make the price better reflect the market scenario.

According to the terms of the renegotiated contract, PLL secures LNG supplies from RasGas at nearly half the current rate of $13 per mmBtu. A price band has been fixed under the revised contract to factor in fluctuations. PLL has also secured a waiver of the Rs 120 billion penalty for not having lifted the full contracted quantity in 2015. (During the year, the company lifted only two-thirds of the contracted 7.5 million tonnes of LNG.) Besides Qatar, India has a number of long-term LNG contracts with suppliers from countries such as the US, Australia, Russia and Canada. In times of low (and stable) global LNG prices, there is a strong case for a country to lock in these prices in fresh/renegotiated long-term contracts.

Inadequate infrastructure

While large quantities of LNG are being imported to meet the country’s energy requirements, a major limit to the growth in imports is India’s stretched infrastructure. At present there are only four operational LNG terminals, all located on the west coast. These are PLL’s Dahej terminal and the Netherlands-based Royal Dutch Shell’s Hazira terminal in Gujarat, Ratnagiri Gas and Power Private Limited’s (RGPPL) Dabhol terminal in Maharashtra and PLL’s Kochi terminal in Kerala.

The present infrastructure enables India to import and regasify over 20 million tonnes per annum (mtpa) of LNG. Overall, the capacity of the existing facilities is expected to increase to 41 mtpa during 2016-17.

Even though the present regasification capacity is over 20 mtpa, operational capacity is only 67 per cent of the total. Of the existing facilities, only the Dahej terminal is operating beyond its capacity. It is running at an estimated 110 per cent of its designed nameplate capacity and will be operating at 120 per cent over the next six months. PLL plans to expand capacity at the terminal to 15 mtpa (from 10 mtpa) by September 2016. On the other hand, the Kochi terminal, which came into service in 2013, remains at single-digit capacity utilisation due to a delay in pipeline construction. The pipeline is now expected to be completed in 2017, and this would push up the terminal’s utilisation rate.

Planned LNG terminals

There are a number of LNG terminals that are planned to be developed along the country’s coastline. Key proposals include a facility at Mundra (Rs 40 billion), one at Ennore (Rs 30 billion) and another at Kakinada (Rs 30 billion).

Apart from these terminals, many public and private developers have also expressed interest in setting up LNG terminals. These include the Chhara and Kutch LNG terminals in Gujarat, Karaikal terminal in Tamil Nadu, Dhamra terminal in Odisha and Dighi terminal in Maharashtra. The combined capacity of these proposed terminals is 36 mtpa. In addition, the Gujarat government is also planning to set up a terminal of 5 mtpa capacity in Jafrabad in Amreli district. However, the availability of ready and adequate gas pipelines to transport gas to end-users including large industrial consumers and city gas distribution firms will remain a challenge.

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Efforts to finalise international deals

As Asian demand for the fuel grows, India has reportedly restarted talks on an LNG purchasing alliance with Japan and South Korea. This alliance could also include China. According to the MoPNG, efforts are being made to bring together these countries and form a network to source affordable LNG.

The way forward

The trend of rising LNG imports is expected to continue till at least 2019, when gas production from domestic new and marginal fields is expected to commence. According to estimates by industry experts, LNG regasification capacity will reach 53 mtpa by the end of 2016 and rise further to 63 mtpa by 2018-19.

This can only be achieved when the challenges impacting the construction of upcoming terminals – delays in statutory clearances for new terminals, lack of regulatory clarity in the downstream segment, high variation in taxes across states resulting in differences in the delivered cost of gas – are dealt with effectively. At the same time, it will be quite challenging for upcoming terminals to tie up LNG supplies at competitive prices. Though, if LNG buying cartels (such as the India, Japan and South Korea alliance) do materialise, then it will lend greater bargaining power to these countries.

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