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    India’s downstream draws investors [NGW MAGAZINE]

Summary

Gas producers need a market for their output as business becomes more competitive and the majors need a local partner to funnel their LNG into India. [NGW Magazine Volume 4, Issue 20]

by: Shardul Sharma

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Liquified Natural Gas (LNG), Featured Articles, Asia/Pacific, Premium, NGW Magazine Articles, Volume 4, Issue 20, Market News, India

India’s downstream draws investors [NGW MAGAZINE]

In recent months, Indian downstream sector has seen some serious investments from global energy majors. As the Indian economy grows and demand for energy expands, the need for infrastructure, such as fuel retail stations, that will help in taking energy products to the customer is growing.

A major investment was announced mid-October by French Total where the company said it will spend $600mn on a 37.4% stake in the privately-owned city gas distribution company, Adani Gas, part of Adani Group. As part of the deal, Total said it will supply LNG to Adani Gas and will also form a joint venture to market LNG in India and Bangladesh.

Total’s announcement came just a few months after UK major BP, in August, said it would form a new joint venture with Reliance Industries that will include a retail service station network and aviation fuels business across India.

In India, a lot of attention is now focusing on building infrastructure related to gas. The government is promoting greater use of natural gas to tackle air pollution in cities. It wants to increase the share of natural gas in overall energy mix from 6% at present to 15% by 2030. Indian petroleum and natural gas minister Dharmendra Pradhan said during the India Energy Week in New Delhi mid-October that an estimated investment of $60bn is lined up in building gas pipelines, terminals, and city gas infrastructure, all at different stages of implementation.

Total bets on Indian gas demand growth

As the outlook for gas demand in India remains robust, Total’s bet on Adani looks like a move to capitalise on this growth. Speaking on the sidelines of the conference, CEO Patrick Pouyanne said India would contribute to the growth in the cash flow of his company’s LNG business within a few years.

“In LNG business, Total has [at present] a cash flow of about $2bn and we are targeting to reach $6bn by 2025. The Indian market will contribute to this growth,” he said.

Adani Gas and Total in the coming years aim to build a network of 1,500 retail stations on the main roads of the country, such as highways and intercity connections. Adani Gas will also be setting up 1,500 compressed natural gas stations for gas distribution over the next 10 years across 71 districts, 68 towns across 15 states in India. In addition, Adani Gas plans to distribute gas to 6mn households in the next decade.

Total and Adani Group already have an equal joint venture to develop LNG regasification terminals in India, including the proposed Dhamra LNG terminal on the east coast of India. Adani Group, along with Gujarat state-run GSPC, also operates a 5mn metric tons/yr terminal at Mundra in the western state of Gujarat. The Mundra terminal was inaugurated last year but has not become operational yet owing to a commercial dispute between GSPC and Adani Group. It could “potentially” become an asset of the Total and Adani Group joint venture once the dispute between GSPC and Adani Group is settled, Pouyanne said.

Talking to CNBC TV18, Adani Group CFO Robbie Singh said the deal is expected to be completed by January 2020. He told the television company that Adani Gas would be the distribution channel for Total and the capital outlay over the next three years would be about Indian rupees 70bn (about $1bn). After the transaction, Adani Group and Total will each own 37.4% of Adani Gas while the rest will be owned by the public. 

Analysts at Wood Mackenzie said Total's investment was a "show of faith" that India's gas share in the energy mix would grow to 15% by 2030. Wood Mackenzie forecasts LNG demand to double during the period.

The development of the Mundra and Dhamra regasification terminals provides Total with market access for its LNG; being on the east coast they will face less competition from other terminals. Adani Gas was an active bidder in the recent distribution auction rounds, which will provide Total with firm demand for gas, and accelerate Total's Indian gas marketing and distribution business.

"Total has been aggressively expanding its LNG footprint. It took over Engie's LNG portfolio in 2018 and recently sanctioned investment in Arctic LNG-2 and the takeover of Anadarko led Mozambique project. It has access to competitive supply that it can provide Adani. However, the global LNG market is already competitively priced to place LNG volumes. So, Adani would not have been short of alternative competitive suppliers. As such, for Adani this is likely to be more about de-risking an investment in expansion while also bringing in a global leader in gas and LNG so support this,” Wood Mackenzie research director Nicholas Browne said. 

Certainty of LNG supply

With global LNG market amply supplied for the next few years, India is expected to see greater supplies coming in from destinations other than Qatar, its main supplier today. Pouyanne said that Mozambique LNG project, where Total has an operating stake, is perfectly placed to efficiently supply LNG to India. In September, Total closed its $3.9bn purchase of an operating stake in the Mozambique LNG project from Anadarko Petroleum. Two Indian entities, ONGC Videsh and BPRL Ventures Mozambique, own a significant stake in the project.

Not only Total, but Tellurian too is looking to get a share of Indian gas market. Late-September, the US-based company signed a memorandum of understanding with India’s Petronet LNG to negotiate the supply of up to 5mn metric tons/year of LNG from Driftwood project. Petronet LNG also intends to spend $2.5bn on an 18% equity stake in the project. Petronet later said 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.

Tellurian is confident that it will be able to supply LNG to India at an affordable price. Speaking during a panel discussion at the India Energy Forum, company’s senior vice president for LNG, Tarek Souki, said that the Driftwood project can deliver LNG to India at a price of $6/mn Btu or less.

“US is well placed to supply LNG to India at a very competitive price. We plan to deliver LNG on a cost-base model and India is the perfect place because of the price sensitive nature of the market here. A cost-based model is the crux of everything we are delivering,” Souki said.

Souki said that there is prolific amount of gas in US and cost of production could be as low as $2/mn Btu, and on a long-term basis it would be $4/mn Btu to get it on the water, and $6/mn Btu delivered to India.

That seemed reasonable to Petronet CEO Prabhat Singh, who was also on the same panel. He said: “India is not looking for the cheapest price but the most affordable price.”

Driftwood LNG FID ‘early 2020’

Tellurian expects to take a final investment decision (FID) on its planned Driftwood LNG export plant in Louisiana early next year, chairman Charif Souki told NGW at the Oil & Money conference in London on October 8. This represents a lengthy delay from earlier plans, perhaps reflecting the huge market uncertainty surrounding demand for LNG.

Before approving the scheme Souki said Tellurian would need to presell around 12mn mt/yr of supply under the project’s first stage. So far India’s Petronet has agreed to take 5mn mt/yr while France’s Total has committed to receiving 2.5mn mt/yr.

Once greenlit, Driftwood LNG will take five years to build and operate for 40 more, Souki told the conference. Its engineering procurement and construction (EPC) contractor Bechtel can deliver the project at $560/mt/yr, he said, allowing LNG on the water at “better than $4/mn Btu”, and probably between $2.50 and $3/mn Btu.

“We and our partners will be able to get LNG anywhere in the world for $6/mn Btu and that will create demand,” he said.

The US currently has 50mn mt/yr of active LNG export capacity and a similar amount under construction. But a further 100mn mt/yr “must be produced” or the country will be unable to produce the oil, according to Souki.

Tellurian is considering obtaining its gas from three basins – Marcellus/Utica, Haynesville and the Permian – via three proposed pipelines. The choice of pipeline has not yet been made, as production prospects at different basins change quickly and a pipeline would only take a year and a half to build, he said. Where will the cheapest gas be, in the US: “Which pipeline will be first and will one be enough? It is a moving target.”

William Powell