1. Pricing woes: This fuel isn’t setting GAIL afire

Pricing woes: This fuel isn’t setting GAIL afire

In the absence of last mile pipeline connectivity, imported LNG is the most expensive fuel in the basket. That is forcing GAIL’s customers to switch to cheaper alternatives.

By: | Published: June 8, 2015 12:03 AM

ON December 26, 2014, India received the 1000th shipment from RasGas at the Dahej LNG terminal in Gujarat. Nearly 16 years back, Doha-based RasGas and New Delhi-based Petronet LNG had negotiated the first sales and purchase agreement (SPA) to import 7.5 million metric tonnes per annum (mtpa) liquified natural gas (LNG) on a take-or-pay basis at a price that was linked to the 60-month average price of crude oil.

The LNG from Qatar fuelled the gas-starved Indian economy for more than a decade but in recent months India has been forced to cut down supplies by 30-35%. The equation has altered since mid-2014 when prices of commodities started to fall, pushing crude oil prices to a six-year low and, with it, prices of gas. But while supplies from RasGas cost about $13/million British thermal units (mBtu), spot prices are hovering around $9/mBtu.

India produces just a fourth of its requirements of gas and demand is expected to shoot up by 17.26% from 446 million metric standard cubic meter per day (mmscmd) in FY16 to 523 mmscmd in FY19. While that should have led to GAIL (India), Petronet, IOC and Shell importing more, there aren’t enough takers for the clean imported fuel. Although LNG started flowing into India more than a decade back, its share of the total gas basket is below 35% indicating the economy’s inability to absorb the expensive fuel.

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In August 1984, GAIL was incorporated to construct, operate and maintain the Hazira–Bijaypur–Jagdishpur or popularly known as the HBJ pipeline, the lifeline of India’s gas grid. Three decades later, the government-owned company is struggling; its 10,900 km network of gas pipelines with 200 mmscmd capacity runs at just 40%. With fields such as RIL-operated KGD6 failing to meet projected output targets, no new gas fields in the offing and consumers not buying expensive LNG, there has been a drastic fall in gas trading and transmission volumes.

In the past two-three years, GAIL has put fresh pipeline projects worth around $3 billion on the back burner as the public-sector gas utility has not been able to find customers. The price differential across various sources of natural gas in the country has seen users shy away from opting for cleaner fuel. On the one hand, gas from the domestic fields of ONGC, Oil India, GSPC and RIL cost $5.18/mBtu, while imported LNG costs nearly twice as much—$9-13/mBtu. Power and fertiliser plants don’t buy imported LNG since they cannot pass on the higher costs to consumers. Smaller firms don’t see the advantage of switching over to natural gas since diesel, naptha and fuel oil are available cheap.

Although demand for LNG is poised to double by 2020, André Lambine, Eclipse Energy’s senior advisor for gas at Platts, points out that domestic prices, at $5.18/mmBtu until September 30,are well below the current Platts JKM and the average term oil-linked prices. The average Japan Korea Marker or JKM is the benchmark for spot physical cargoes.

According to the International Group of Liquefied Natural Gas Importers (GIIGNL), the top five LNG importers in 2014 and for the first five months of the current year are Japan, South Korea, China, India and Taiwan. No doubt India’s growing economy (latest OECD forecast pegs growth at 7.3% in 2015) has enough appetite for gas—but pricing is the key. In the absence of last mile pipeline connectivity and lack of other infrastructure, imported natural gas turns out to be the most expensive fuel in the basket. Indian firms such as GAIL and IOC have sealed contracts to import more than 10 mtpa of LNG starting 2018. Now, the challenge for them is to find consumers at home to sell these volumes.

BC Tripathi, GAIL’s chairman and managing director, hopes the gas to be imported from US would be offered at ‘competitive rates’ and it would land on Indian shores at less than $9/mmBtu. “We are not nervous, but we are cautious,” Tripathi said.

To make sure it can sell all the gas it has contracted from the US, GAIL is looking for customers overseas. Some volumes have been tied up with Shell –at an undisclosed price—and another 0.5 mtpa at home.

GAIL has signed up with Cheniere Energy Partners to buy 3.5 mtpa of LNG from the Sabine Pass Terminal in Louisiana on FoB basis, from January 2018. It has booked another 2.3 mtpa capacity to export LNG from the Dominion Cover Point terminal in Maryland. But the company needs help; the government must make LNG more affordable and incentivise users; the promised 15,000 km of gas pipelines via PPPs must be built quickly.

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