1. How importing LNG can secure India’s energy future

How importing LNG can secure India’s energy future

Importing liquefied natural gas (LNG) is the best alternative remedy for India’s natural gas deficiency

Updated: April 12, 2016 3:25 PM

Natural gas is considered as a bridge green fuel in many countries, including India. Often, natural gas producing and consuming countries are distantly located, hence face multiple transportation challenges, such as unavailability of pipeline network—the most popular mode of transporting natural gas—geopolitical issues, difficult terrain to build pipelines passing through multiple countries having some level of risk perception and security concerns, high transit fees, massive investment and project concerns.

Despite these, gas-rich countries constantly look out for buyers to sell out surplus gas to fuel their economic progress and prosperity.

Simultaneously, energy-deficit countries—such as India, South Korea and Japan—are forced to rely on import of natural gas. In fact, today, Asia drives 72% of the global liquefied natural gas (LNG) demand. In this context, the focus on natural gas trade holds paramount importance to both resource rich and deficient nations.

In the absence of adequate transnational pipeline network, transporting LNG under cryogenic conditions remains the most preferred alternative.

LNG trade has been increasing across the globe—34 countries are currently importers, compared with 15 in 2005, and LNG import reached 245.2 million tonnes (MT) in 2015, a 2.5% increase over 2014.

Traditionally, buying LNG on long-term contract was the preferred option, but the recent downward trend in spot LNG prices has altered LNG economics. Now, buyers find spot LNG cheaper than long-term contracts, thus they are compelled to rethink about their purchasing mix. Reduced offtake under long-term contracts forces producers to enter into spot market to monetise gas, which creates supply glut and brings prices further down. As a result, spot/short-term LNG trade is gaining momentum, with a share of 68.4 MT—which is 27.9% of the total trade in 2015—and India contributed about 14% of total spot/short-term LNG trade.

At the end of 2015, global re-gasification capacity stood at 777 MMTPA (million metric tonne per annum), which is 2.5 times the liquefaction capacity of 308 MMTPA. This indicates that some countries have built capacity for future demand. With 14.6 MT, India contributed 5.95% of global LNG import in 2015. Qatar was the most preferred supplier, accounting for 61% of total LNG shipment to India, followed by Nigeria (14.7%) and the remaining 24.3% shared by 11 countries. However, new destinations like Australia and the US are fast emerging as viable alternative options. Already, GAIL India has booked—through long-term contracts—supply of 3.5 MMTPA and 2.3 MMTPA from Sabine Pass and Cove Point, US, respectively, and the shipments are expected to start from 2017-18 till 2037-38.

Indian LNG buyers are far more open to working out an optimal LNG sourcing mix. GAIL India recently imported a spot LNG cargo from the US and this was considered as a big change in global LNG trade dynamics. Recent global LNG trade developments have created opportunities for renegotiating operating terms and conditions of existing long-term LNG contracts. With active support from the government, Petronet LNG renegotiated with RasGas, Qatar, to change the pricing formula, soften take or pay clause, and other conditions, resulting in benefits like price reduction from $12 to $7 per mmBtu and penalty waivers.

The Petroleum and Natural Gas Regulatory Board projects India’s natural gas deficit to rise up to 516 MMSCMD (million metric standard cubic metre per day) by 2029-30. Due to expansion of natural gas user base, the demand-supply gap may further widen beyond 2030 and sluggish domestic production would not help much. Therefore, LNG import could be an important solution to bridge the gap.

The current re-gasification capacity of 25 MMTPA remains underutilised, with about 58% capacity utilisation. There could be multiple reasons for this, including lack of pipeline connectivity between re-gasification facility and demand centres, like in the case of Kochi LNG Terminal. However, to meet anticipated surge in natural gas future demand, planned LNG infrastructure—including both brownfield and greenfield projects—is expected to exceed 65 MMTPA by 2030.

Timely development of LNG terminals and their optimisation faces challenges such as attracting investment, ensuring cheap and reliable sources of LNG, construction of adequate evacuation infrastructure to transport re-gasified LNG from the terminals, and establishing a robust gas value chain for reaching out to all potential consumers across the country.

The government and the regulator must make adequate efforts to create an enabling business environment for lucrative returns on investment in the highly capital-intensive and risky infrastructure projects like LNG terminals and gas pipeline networks.

In fact, the government has to encourage domestic private and public sector firms to acquire participatory stakes in assets in oil- and gas-rich countries, which would help ensure supply security to a great extent. Indian oil and gas companies may acquire equity stakes in liquefaction facilities in resource-rich countries, wherever permissible. Such measures can enhance securing cheap sources of LNG on a long-term basis. To fully capitalise on emerging import opportunities, domestic LNG infrastructure and the pipeline network need immediate attention.

Considering the limited domestic gas reserves, declining production and favourable global factors, LNG import is the best alternative remedy for addressing India’s natural gas deficiency.

Sanjay Kumar Kar is head, Department of Management Studies, Rajiv Gandhi Institute of Petroleum Technology, Noida ([email protected]).

Manish Vaid is junior research fellow, Observer Research Foundation ([email protected]). Views are personal

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