Low LNG Prices Pose Risk to India's Deepwater Gas: WoodMac
India's new deepwater gas production could be under pressure from low spot LNG prices, Wood Mackenzie said in a report published on July 21.
WoodMac expects deepwater deposits to drive India's gas production growth, adding over 1bn ft3/day of new supply by 2023. However, only 15% or 200mn ft3/day of this supply has been contracted to date. With market demand impacted by Covid-19, and low spot LNG prices expected to persist at least until 2022, the full commercialisation of these deepwater volumes is at risk, it said.
"Gas from the deepwater fields will be sold in Andhra Pradesh and the much larger Gujarat/Maharashtra where it will compete against spot LNG directly. The critical period for producers will be the 2020/2021 period when spot prices are set to remain low,” WoodMac principal analyst Alay Patel said. "We estimate that around 35% of uncontracted volumes in 2022 are at a higher risk of being replaced by spot LNG."
The eastern states of Andhra Pradesh and Telangana do not have access to LNG, with the regional pipeline network supplied primarily by state-run ONGC and Reliance's fields at Kakinada port. With no competition from spot LNG, sellers only need to ensure that gas prices are viable for industrial or power consumers who can absorb incremental volumes, WoodMac said.
The western region of Gujarat and Maharashtra, however, remains mature and competitive due to robust LNG storage and pipeline infrastructure, along with ready access to LNG and domestic gas supply. According to WoodMac, the next 176mn ft3/day of deepwater gas which is going to be marketed will be costlier than spot LNG at 8.4% indexation (at well-head) after adding the East-West pipeline tariff.
"Indian gas buyers have generally preferred oil-linked contracts which tend to be more transparent and less volatile vis a vis gas hub or spot LNG prices,” Wood Mackenzie senior analyst Vidur Singhal added. "However, procuring spot LNG mitigates the risk of 'take or pay' obligations compared to the new deepwater domestic gas contracts, as buyers are indebted to pay for a minimum 80% of contracted gas volumes regardless of seasonal demand changes. Historically, price-sensitive Indian buyers have increased spot purchases when prices drop, and we see this trend playing out through next year."
LNG appears to be more competitive economically compared to deepwater domestic gas over the next two to three years. However, not all volumes are at equal risk, WoodMac said. Regional market, upstream competitiveness and strategic decisions of buyers will influence the level of spot which replaces domestic gas.
"Upstream companies might have to face difficult decisions when they auction their volumes through to 2022. Either accept lower prices and consequently low returns or delay sales until the prices are more attractive,” Patel said.