Rising Demand

LNG market scenario

The share of natural gas in India’s energy mix is likely to move closer to the target of 15 per cent from the current 7 per cent, as policy initiatives translate into progress on the ground. International competitive bidding for oil and gas fields under the Open Acreage Licensing Policy (OALP) and the subsequent award of contracts will give a boost to domestic gas production, which has been falling for the past five-six years. For around 60,000 square km of area for oil and gas exploration, 51 proposals have been submitted under the first round of the OALP.

However, enhanced production from the OALP regime will only begin to show results in a couple of years. In the meantime, India has no option but to continue its reliance on liquefied natural gas (LNG) imports, which presently account for about 44 per cent of the gas supply in the country.

LNG meeting the demand-supply gap

Domestic natural gas production has been falling since 2012 while demand has been on the rise. The total gas supply in 2016-17 was about 152 million metric standard cubic metres per day (mmscmd) whereas domestic production was 84.5 mmscmd and demand was as high as 473 mmscmd. LNG imports stood at 67.63 mmscmd in 2016-17, around 16 per cent higher than the previous year. The consumption of gas also grew commensurately to 152.15 mmscmd in 2016-17 from 143.3 mmscmd in 2015-16, primarily due to the higher consumption of LNG.

India is currently the fourth largest importer of LNG in the world after Japan, South Korea and China. LNG imports from April to November 2017 were 47.55 mmscmd.

Lower global LNG prices coupled with oversupply have made it a buyer’s market. The US Henry Hub spot gas prices have been in the range of $2 per mmBtu to $3 per mmBtu, while Japanese LNG prices have fallen significantly from a high of $16.75 per mmBtu in 2012 to $6.94 per mmBtu in 2016. As a result, Petronet LNG Limited, successfully renegotiated long-term LNG contracts with RasGas and Exxon Mobil in 2016 and 2017 respectively.  GAIL (India) Limited is in the process of renegotiating the price of LNG contracted from the US. GAIL has held a number of discussions with Cheniere Energy and Dominion Energy for the renegotiation of contracts. The most recent round of discussions was held in November 2017.

GAIL has a deal to buy 3.5 million tonnes per annum (mtpa) of LNG for 20 years from Cheniere Energy and has booked capacity for another 2.3 mtpa at Dominion Energy’s Cove Point LNG liquefaction plant.

According to media reports, GAIL wants to renegotiate the 2011 sales and purchase agreement with Cheniere Energy for importing 3.5 mtpa with yearly fixed fees of $548 million and a term of 20 years. It had agreed to pay Cheniere $3 per million British thermal units (mmBtu) plus 115 per cent of the final settlement price for the New York Mercantile Exchange Henry Hub natural gas futures contract for the month for which the cargo is scheduled. Also, 15 per cent of the fixed portion of the contract sales price will be subject to an annual adjustment for inflation.

GAIL wants the fixed portion to be lowered to bring down the landed cost of LNG to around $7 per mmBtu as against the present $9 per mmBtu. Supplies from the US are scheduled to begin in 2018. GAIL has also renegotiated its long-term LNG contract with Russian energy firm Gazprom. In 2012, it had signed a deal with Gazprom to buy 2.5 mtpa of LNG for 20 years from the Shtokman LNG plant in the Barents basin. Under the deal, shipments are expected to start in 2018-19 and will be linked to crude oil prices.

Given the high dependence of the country on LNG imports, the expansion of existing terminals as well as setting up of new ones has become a necessity. Currently, India has four operational LNG terminals, at Dahej, Hazira, Dabhol and Kochi, with a cumulative capacity of 30 mtpa. In addition, seven terminals with a capacity of 19 mtpa are under-construction and another eight with 30 mtpa of capacity are at the proposal stage. Most of the under construction projects are expected to be completed between 2018 and 2020. Meanwhile, the two operational terminals at Kochi and Dabhol operate under capacity. This is a result of poor pipeline connectivity from the Kochi terminal and the Dabhol terminal being non-operational during the five monsoon months due to the lack of a breakwater.

At the same time, the country is also diversifying its import sources to ensure uninterrupted and reliable LNG supply. At present, India imports LNG from 13 countries, led by Qatar contributing 62 per cent, followed by Nigeria (12 per cent) and Australia (5 per cent). Recently, the US, Yemen, Algeria and Oman have also started supplying LNG to India. To further diversify sources, imports from Papua New Guinea, Brunei Canada and Mozambique are also being considered.

One of the biggest challenges facing the LNG sector is the lack of pipeline connectivity from the terminals. This connectivity is important as there is a lack of significant demand at the coast (mega power plants or fertiliser plants) near regasification terminals. Key issues in laying pipelines include environmental clearances, land acquisition and a manyfold increase in the cost of land.

Most of the upcoming terminals are trying to address the connectivity issue by laying their own pipelines (for example, Ennore) or by engaging with transmission companies (such as GAIL and Gujarat State Petronet Limited).

Use of LNG as a transportation fuel

The Ministry of Road Transport and Highways approved LNG as an automotive fuel last year opening up the use of LNG for buses, trucks, railways and inland waterways barges. Traditionally LNG has been used by the power, fertiliser and city gas distribution sectors. A successful pilot run of the first LNG-driven bus has already been carried out in Kochi.

Indian Railways is exploring the use of LNG as a fuel and has finalised a tender for converting main line locomotives from diesel to dual fuel (LNG and diesel). The government is also evaluating the use of LNG in coastal shipping.

Further, the government has changed gas cylinder norms to enable LNG storage and distribution to LNG stations.

Outlook

The global gas industry is in the early stages of significant market restructuring. Going forward, it might take the shape of a dynamic market that resembles other commodity markets, feel experts. The duration of long-term contracts is decreasing from 25 years to 10-15 years and new pricing structures such as hybrid indexation are emerging.

Moreover, fragmented pricing of LNG could lead to complications. With the many options available to buyers, there is a lack of long-term contracts which is hindering the development of the LNG market, as without long-term contracts, lenders lack the financial security to invest in liquefaction projects. The share of spot/short-term imports in total LNG imports in India increased from 43 per cent in 2012 to more than 55 per cent in 2016. Overall LNG imports are estimated to double over the next five years.

The industry and market must adapt to the changing scenario. India will have to keep these global trends in mind while expanding capacity and creating LNG infrastructure.

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