Black swan events in global markets upset India's long-term LNG story

With prices soaring and competition for the fuel rising, India's inability to negotiate term contracts with global suppliers puts Rs 2 trillion of investment at risk

Last year, a varied bunch of Chinese energy companies concluded a record 23 long-term liquefied natural gas (LNG) supply contracts for an average duration of 15 years. The US, Russia and Qatar accounted for three fourths of the 27 million tonnes a year of fuel contracted by Beijing to hedge volatile prices and enable assured supplies, Washington-based Middle East Institute said.

The volumes exceed India’s total LNG import purchases for 2021. Despite making a later entry than India into the LNG club, China became the world’s biggest LNG importer last year, unseating Japan, helped by smart purchasing, extensive transport infrastructure, and higher affordability.
 

China also managed last year to get a competitive indexation for its LNG supplies at a little over 10 per cent to oil prices on term pur­chases, a Petronet LNG official said. India aims to conclude contracts at such competitive benchmarks, the official added. But Ind­ian companies failed to grab a sin­gle long-term deal last year, ex­pecting even better rates.

The wait has proved dear, and India may have missed the purchase boat, threatening a fledgling multi-billion dollar gas economy — dem­and for LNG fell in Sep­tem­ber by 31 per cent to 1.35 million tonnes from August, according to data from London-based data analytics firm Vortexa. Con­secu­tive Black Swan events — the pande­mic and the Ukraine conflict — have sent LNG rates to unim­aginable levels of over $50 per million Btu, a six-fold increase over what India paid for its fuel last year.
 

“Russia’s continued curtailment of natural gas flows to Euro­pe has pushed international pri­ces to painful new highs, dis­rupted trade flows and led to acute fuel shortages in some emerging and developing eco­nomies, with the market tightness expected to continue well into 2023,’’ the International Energy Agency (IEA) said in its latest report on natural gas.

 

India’s appetite for gas is gro­w­ing, fuelled by over Rs 2 trillion of investments in city gas netw­orks, LNG import terminals, gas transmission lines, and fertiliser plants.

“The consumption of LNG is expected to increase over the next three to five years with new CGD or city gas distribution companies coming in, new fertiliser capacities coming up and usage from other industries like petrochemicals picking up,’’ said Bhanu Patni, associate director, India Ratings and Research. “How­ever, with domestic gas avail­ability being limited, impor­ted LNG will remain a mainstay.’’ A key constraint is on the pricing, Patni added, and until the prices cool off, term contracts will remain few and far between.
 

Urgency is paramount because India’s biggest LNG term contract, with Qatar, expires this decade; and Russia defaulted on a term agreement.
 

It takes India three to five years to conclude these contracts. India’s first LNG term contract, agreed in early 2000, for 7.5 million tonnes a year of the fuel concludes in 2028. Volumes were subsequently increased to 8.5 million tonnes a year, accounting for a third of last year’s total LNG imports, but a renewal is proving elusive. Earlier this year, Russian Gazprom reneged on a 20-year contract to supply GAIL with 2.5 million tonnes of LNG a year, citing sanctions from the Ukraine war, a GAIL official said.
 

Until last year, the usual suspects competing with India for term LNG supplies were Japan, South Korea, China and Taiwan. Pakistan and Bangladesh have made recent inroads into LNG procurement. But the big elephant in the room is the European Union, which in an attempt to wean itself off Russian pipeline gas supplies is trying to substitute a humongous amount of gas with LNG. “European demand for LNG has set off global competition for supplies,’’ the IEA said.
 

Two of the world’s three biggest producers of LNG in Qatar and the US supply India. The third, Australia, mainly supplies China. Over 80 per cent of India’s LNG supplies are via term contracts, linked to crude oil or the US gas benchmark Henry Hub. These shipments currently cost much less than spot supplies. But India is unable to renew its contract with Qatar because it is seeking lower rates when Europe is ready to pay a premium.
 

India’s contract with Qatar is at an indexation of 12.67 per cent of the prevailing Brent price plus a premium. But Qatar recently agreed to supply Pakistan, Bangl­adesh and China at a cheaper 10.2 per cent indexation to oil. Petronet LNG CEO A K Singh had said in a call earlier this year. India is seeking similar slopes.
 

But Europe is now offering much higher rates to Qatar. The emirate will ship around 15 million tonnes of LNG to Europe this year, around a fifth of its LNG capacity, and will “consistently” deliver similar amounts “if the situation continues”, Qatari energy minister Saad bin Sherida al-Kaabi has said.
 

Affordability is a key issue. The premiums on new term contracts have doubled after Europe ent­ered the market, industry officials said. It has become difficult to conclude even a 1 million tonne a year term contract, a GAIL official said. Of greater concern is the impact on upcoming LNG facilities. India will add around 28 million tonnes a year of LNG import capacity to its existing 42.5 million tonnes in the next five years, according to CRISIL Research. Utilisation of these terminals would primarily rely on long-term volumes, said Hetal Gandhi, a director at the analytics firm.
 

The chairman of US natural gas company Tellurian Charif Souki has said that cheap US gas is a thing of the past. “If you really want to justify an investment ... you have to think of $10-$12 (per million Btu),” Souki told the En­ergy Intelligence Forum in Lon­don. Petronet after years of talks had failed to conclude a LNG supply contract with Tellurian despite prodding by New Delhi and the Trump administration. It had said that term deals were much more expensive than spot supplies. India’s gas industry expected LNG prices to always be in the $2-$3 range, a BPCL official said.
 

But the war has changed everything. LNG imports into Europe will set the floor price of LNG in global markets, and as long-term contracts expire, India will face tightness in LNG markets more acutely, said Tilak Doshi, a Singapore-based global oil expert.