Scope for Growth: LNG market trends, recent developments and future plans

Despite the liquefied natural gas (LNG) market being constrained for the past two to three years, India has maintained its position as the world’s fourth-largest buy­er of LNG, after Japan, South Korea and China. The market first experienced strong fluctuations in 2020, triggered by the pandemic-in­duced constraints on the economy. Due to this, India’s LNG imports dropped from 6,660 million metric standard cubic metres (mmscm) in the January-March 2019 quarter to 4,920 mmscm in the April-June 2020 quarter, owing to significant supply chain disruptions.

However, a year later, during the April-June 2021 quarter, due to lower domestic production coupled with higher demand and lower prices at a major distribution centre, Henry hub, imports increased by 66 per cent year on year to 8,181 mmscm. The trend reversed again in 2022, as imports fell further due to escalating global prices and a rise in domestic production. The cumulative import of 7,400 mmscm for April-June 2022 was 9.6 per cent lower than in the corresponding period of the previous year. This dipped by another 6 per cent by end 2022.

In continuation of the diverging trend, in April 2023, the total imports were 2,213 mmscm (provisional), an increase of 6.5 per cent over the corresponding month of the previous year. This can be attributed to the softening of Asian spot LNG prices in 2023, whi­ch led to a resurgence of interest from Indian buyers.

Current capacity

As of May 2023, India imports LNG through six facilities with a combined capacity of about 47.7 million tonnes. Petronet LNG Limited (PLL) opera­tes India’s biggest LNG import terminal at Dahej in western India. The terminal has the ca­pacity to import 17.5 million tonnes per annum (mtpa) of LNG. Moreover, it is now operating at a capacity of around 95 per cent, compared to 85 per cent a year before.

Growth initiatives

India has been advocating for the use of natural gas in order to reduce emissions prior to the full transition to fossil-free energy, a crucial step in achieving the goal of net-zero emissions by 2070. Additionally, India has set a target to increase the share of natural gas in its energy mix to 15 per cent by 2030, a major increase from the current 6 per cent.

In order to achieve this, India has made substantial investments in infrastructure projects, including the development of gas pipe­lines, LNG import terminals and compressed n­atural gas stations. As per the Ministry of Pet­roleum and Natural Gas, an estimated 100,000 buses and trucks are also projected to use LNG by 2024. Moreover, the Centre has launched policies to increase domestic production of natural gas and has adopted strategies for promotion of biofuels.

Recently, the Centre approved the revised domestic natural gas pricing guidelines for gas produced from the nominated fields of the Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL), New Exploration Licen­s­ing Policy (NELP) blocks and pre-NELP blocks. The price of such natural gas will be 10 per cent of the monthly average of the Indian Cru­de Ba­sket. For the gas produced by ONGC & OIL, the price, determined by the administered price mechanism (APM), shall be subject to a floor and a ceiling. Gas produced from new wells or well interventions in the nominated fields of ONGC and OIL will be allowed a premium of 20 per cent over the APM price.

The new guidelines aim to ensure a stable pricing regime for domestic gas while provi­d­ing protection to producers from market fluctuations, with incentives for enhancing production.

Recent developments

Indian Oil Corporation Limited (IOCL), the largest refiner in India, has entered into a long-term agreement with TotalEnergies from France and Abu Dhabi Gas Liquefaction Company Limit­ed LNG (ADNOC LNG) to secure 2 mtpa of LNG.

Under the long-term contract, set to commence in 2026 for a duration of 10 years, Total­Energies will supply up to 0.8 MMT LNG annually to IOCL. The refiner has signed a similar agreement with ADNOC LNG to establish a long-term sa­le and purchase agreement. Under this, ADNOC LNG will supply 1.2 mtpa of LNG to IOCL, for 14 years starting from 2026 (till 2039).

The Comprehensive Economic Partnership Agreement between India and the UAE exempts LNG imports from the UAE from customs duty in exchange for a 2.5 per cent customs duty plus surcharge. The contract with ADNOC LNG will be the first of its kind in India, and is a step towards enhancing India’s energy security.

These may be attributed to IOCL’s proactive efforts in pursuing long-term agreements to en­sure a stable supply of LNG, with the aim of strengthening and expanding its gas infrastructure. Additionally, they mitigate the inherent fluctuations observed in the spot LNG market. Besi­des diversifying IOCL’s LNG supply source, the agreements will also help satisfy the rising de­m­a­nd for cleaner, more sustainable fuel sources.

Reducing reliance

India should prioritise the diversification of its energy sources to achieve energy security and reduce dependence on expensive imported LNG. In a way, India’s reliance on external sour­ces for LNG has made the country’s energy security susceptible to global events. For ins­tance, LNG supply to India was disrupted due to the Russia-Ukraine conflict. Moreover, a subsidiary of the Russian energy major Gazprom, Gazprom Marketing and Trading Singapore, now a German company called Sefe Marketing and Trading, had defaulted on supplying eight shiploads of LNG under a 20-year deal.

Concerted efforts are needed to minimise the dependence on imported LNG. This could be achieved by augmenting domestic gas supply by diversifying energy sources. Investing in coal bed methane and coal gasification technology, for instance, could enable efficient use of the abundant domestic coal reserves. At Tal­cher, India’s first urea plant utilising coal gasification technology is being revamped. Once operational, it is anticipated to substantially reduce the LNG import bill. In addition, biomass gasification has the potential to decrease reliance on imported LNG for electricity generation and fertiliser production.

Going forward

India’s LNG infrastructure is heavily underutilised. As per the PPAC, as of April 2023, apart from PLL’s Dahej Terminal and Konkan’s Da­bhol terminal, import terminals had a capacity utilisation rate of less than 22 per cent. However, go­ing forward, the start of operations at the Dha­m­ra terminal is expected to support the demand. The expansion of the Urja Ganga gas pipeline to the Northeast will also open up a new market supporting LNG imports.

As a market that has shown a straying pattern in the recent past, the outlook remains un­certain. However, the recent policy push has made the regulatory environment favourable.

Harman Mangat