India hedges its LNG risk [NGW Magazine]

India depends on Qatar for a large proportion of its LNG imports. However, in recent years, it has successfully signed long-term contracts with US, Russia and Australia. A recent memorandum of understanding between state-run Petronet LNG and Tellurian is another move in that direction.

India started importing LNG in 2004 and since then the volumes have been steadily rising. As the government steps up its battle with air pollution, import growth has accelerated in the last five years.

During the 2018-2019 financial year (April-March), India imported close to 22mn metric tons of LNG, setting a record. Qatar remains the biggest single supplier with Indian state-run Petronet LNG having a long-term agreement with RasGas to buy 8.5mn mt/year of LNG. However, in recent years, the south Asian nation has tried to diversify the source and now has long-term contracts with US, Australia and Russia. Experts believe this makes a lot of sense for multiple reasons.

“Diversifying LNG cargo sourcing will be prudent from the risk management point of view, as supplies from Qatar could be subject to geo-political risks, especially tensions along the Strait of Hormuz which could result in disruption in supplies to India. Moreover, diversification of sources enables the buyers to negotiate and get better commercial terms on incremental supplies from existing sources. Over the last few years, India has been able to source successfully from other countries such as Australia and US, besides African countries,” said K Ravichandran, senior vice president at rating agency ICRA.

Ravichandran argues that irrespective of the source, the gas has to be priced competitively. He says that India has one of the most price sensitive markets for LNG, with disruptions and changes to business dynamics lowering the potential demand for LNG from what was forecast as recently even just five to eight years ago.  

“The consumers are increasingly demanding significant flexibility in purchase contracts and are loath to sign 20- or 25-year agreements, when the gas markets are evolving in a dynamic manner. Moreover, customers expect the landed cost of LNG to be competitive against competing liquid fuels and solid fuels at all times,” he said.

Ravichandran advocates having a portfolio of contracts with different price structures such as Brent-linked, JKM-linked, Henry Hub-linked and hybrid contracts, which should enable LNG marketers to meet the expectations of the market.

The availability of affordable LNG is very important if gas demand in India is to consistently grow at a steady clip. The government has been working on promoting greater use of natural gas in order to combat air pollution in urban clusters. It is looking to increase the share of natural in the energy mix from about 7% at present to 15% by 2030. And as domestic production is expected to do little better than flatline in the coming years, imported LNG will pay an important role if the target has to be achieved. 

Doubts persist over Petronet-Tellurian MoU  

In its latest attempt to diversify India’s LNG sourcing, Petronet late-September signed a memorandum of understanding with Tellurian to negotiate the supply of up to 5mn mt/yr of LNG from the Driftwood export project. Petronet LNG also intends to spend $2.5bn on an 18% equity stake in the project. The ambitious announcement did not go well with Petronet LNG investors and the stock declined sharply after the announcement. Some doubts about the deal remain.

“Investors are concerned about Petronet's balance sheet and its ability to finance such a major investment. It is now up to Petronet to prove that it can support the transaction to the scale mentioned,” said Wood McKenzie research director Nicholas Browne.

To allay some fears, Petronet LNG management said in a conference call that its direct equity investment may be restricted to $0.5-1bn for 1-2mn mt/yr of capacity, while the remaining investment for 3-4mn mt/yr will be undertaken by its affiliates, who are promoters and off-takers. The company reaffirmed that the final transaction, possibly by March 2020, will be contingent on back-to-back contracts to be signed with its off-takers, such that the company is not exposed to volume or pricing risk.

“Petronet LNG is targeting to secure long-term LNG supplies at low cost – optimistically at sub $6/mn Btu landed in India – amid favourable environment currently, to partly substitute its RasGas volumes post expiry of contract in calendar year 2028,” Kotak Institutional Equities said in a report.

Browne said he expects that both companies will now look to fine-tune the details of the MoU to move it to a heads of agreement and sale and purchase agreement.

Kotak further stated that for Petronet LNG, which operates two regasification terminals in India, the proposed diversification into LNG liquefaction business may be a cause of concern given the risks of cost and time overruns associated with such projects.However, Tellurian’s indicative economics for the Driftwood terminal seems quite attractive given low integrated capital cost of $1,320/mt/yr and cumulative operating cost of $3/mn Btu, which will allow the company to deliver LNG to India at up to $4.5/mn Btu, Kotak said.

“Tellurian’s ability to secure long-term supply of low-cost gas from the US shale regions and adequate backing by other global majors through equity and/or off-take contracts, may provide comfort on potential returns through dividends for Petronet LNG in the medium term,” Kotak added.

Browne believes there is enough demand in the Indian market for such a significant volume of LNG to be contracted by Petronet. “We forecast LNG demand will be 37mn mt/yr in 2025 with 15mn mt/yr of this currently uncontracted. As such the market space is available even for such a large volume,” he said.

Demand outlook for LNG in Indian market may be promising and US LNG may still be competitive against other growing sources of LNG such as Russia. But Gail, another state-run enterprise, has not had a very pleasant experience when it comes to selling US LNG in India. According to Browne, Petronet can overcome this by taking a different approach.

“Gail has struggled to market US LNG downstream as buyers have not been willing to buy on a Henry Hub indexed basis. However, if Petronet markets the LNG on a fixed fee then it could overcome this resistance,” Browne said. 

City gas and non-traditional sectors to drive gas demand

India’spower and fertiliser sectors have been the keystones of gas demand, but the demand from the power sector has dropped significantly in the last few years owing to competition from renewable energy and coal. Also, the high price of regasified LNG makes gas-based power generation uneconomic. Ravichandran believes the fertiliser sector will still see demand growing, thanks to the expected commissioning of five to six new urea plants.  

However, it is the city gas distribution (CGD) sector that will drive incremental demand, thanks to the award of several new geographical areas in the latest CGD licensing rounds. Refineries, petrochemicals and steel, are the other major consumers.

According to Ravichandran, it will be non-traditional applications such as L/CNG stations, long-distance trucking, buses, trains, barges and using trucks to distribute LNG to markets that are now off-grid that will see faster growth, admittedly from a low base.