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The recent diplomatic events involving Qatar are unlikely to have a near-term impact on the Liquefied Natural Gas (LNG) volumes imported into India by Petronet LNG Limited (PLL; 'IND AA+'/Positive), says India Ratings and Research (Ind-Ra) as LNG vessels continue to sail for India from Ras Laffan Gas Terminal (Ras-Gas). In Ind-Ra's assessment this event is credit neutral on PLL. Thus, Ind-Ra does not factor in any immediate volume or price impact on the end-user industries viz. fertiliser, power, refinery and city gas distribution.
Moreover, in case LNG supplies from Qatar are affected, there is ample liquidity in the spot LNG markets globally and hence volumes disruption, if any, will be for a limited period. However, the diplomatic stand-off in Ind-Ra's opinion highlights geopolitical concentration of India's energy imports.
Saudi Arabia, Egypt, United Arab Emirates, Yemen, Libya and Bahrain have severed diplomatic ties with Qatar recently and cut-off land, sea and air contact. Qatar exports its LNG largely through Strait of Hormuz which passes though Iranian and Omani territorial waters and transit through the Strait is protected under a UN Convention. While LNG exports from Qatar could be threatened in the event that Iran and Oman restrict shipments from Qatar, the possibility of this is remote given Iran's diplomatic stance. Moreover, Fitch Ratings in its report 'Fitch: Duration of Diplomatic Dispute is Key to Qatar Impact' believes that the other Gulf Cooperation Council (GCC) members do not desire to completely alienate Qatar, which suggests that both sides will work towards a relatively swift resolution.
The immediate fallout of the diplomatic isolation is limited to fuel costs of LNG vessels, as vessels heading to Qatar or arriving from Qatar are not able to halt at the port of Fujairah, which is a key bunkering port. This means that LNG vessels use LNG as fuel instead of FO/LSHS. Ind-Ra notes that the switch-over is unlikely to have any material impact on the transportation costs (around USD 0.35/mmbtu) and on the profitability of PLL.
However, PLL's long term contract with Qatar extends till 2028 and Ind-Ra discounts the possibility of an immediate second renegotiation given that the contract has already been renegotiated recently. Hence the long-term LNG imports from Qatar into India are unlikely to be repriced significantly and will continue to track crude prices.
Ind-Ra notes that though the LNG volumes from Qatar have not been directly impacted due to the diplomatic stand-off, the same could be under threat if short-term LNG prices remain soft as compared to long-term ones, which Ind-Ra expects to be the case. Ind-Ra notes that the LNG market has transitioned to a buyer's market from a seller's market and the buyers would flex their power after expiry of the existing long term contracts. Qatar's diplomatic stand-off adds to the buyers' advantage as Qatar depends on the oil and gas for 50% of its gross domestic product and would be keen to retain its exports.
India Ratings had highlighted in the report 'Spot Liquefied Natural Gas Prices Fall 15%-21% Lower Than Term Prices, Could Impact Long-Term Volumes' that spot LNG prices are likely to remain benign, as LNG markets become buyer dominated from supplier dominated. This would be driven by a combination of: (i) significant supply-side capacity additions, (ii) peaking of demand from major LNG importers (Korea, Japan and China), (iii) competition from alternate fuels such as fuel oil and coal, (iv) increase in the share of 'non-long-term' LNG, (v) expiration of long-term LNG contracts and (vi) increased competition in the Indian LNG market.
Globally, the LNG liquefaction capacity stood at 301.5mtpa as of January 2016. Over the next five years, the International Gas Union estimates that capacity will grow by 46% (141.5mtpa, primarily in North America (62mtpa) and Australia (53.8mtpa). It is also interesting to note that nearly 890mtpa of new liquefaction capacity is proposed, with 670mtpa in US and Canada alone, on account of the shale gas supplies. According to India Ratings, even if a significant part of this proposed capacity does not come on-stream the supply will remain significantly higher than demand. Moreover, in an oversupplied market, the key liquefaction players presently (Qatar and Australia) could price gas at operating costs. Additionally, renegotiation of long-term contracts in India in terms of pricing formula and destination flexibility, points to the leverage that buyers are enjoying in the LNG market.
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