India taps Canada for gas as domestic production falters

Written by Gireesh Chandra Prasad | Gireesh Chandra Prasad | New Delhi | Updated: Mar 27 2012, 15:28pm hrs
For the first time, New Delhi is looking to the North American continent to secure its energy needs. India has started talks to import natural gas from Canada, the worlds third-largest producer which is facing falling demand from the US, where a shale gas bounty has brought self sufficiency in clean energy. Besides Canada, India has also set its eyes on shale gas from the US.

Canada will be able to ship gas to India in a couple of years as construction of gas export terminals like the one at the Port of Kitimat in British Columbia is completed. Two officials privy to the matter told FE that high-level talks at the government and corporate levels are under way.

Stagnating domestic output of coal and gas has necessitated increased imports by India, which is adding huge capacities in the power sector to boost economic growth. An official with state-owned gas utility GAIL (India), who did not wish to be named, told FE that even after adding ocean freight charges, buying liquefied natural gas (LNG) from Canada would be much cheaper than buying gas from the global spot market, where it trades at about $14-15 per million British thermal units (mmBtu).

We struck the recent deal to buy gas from Cheniere Energy Partners of US at Henry Hub price, which is less than the Japan customs-cleared crude (JCC) price, he said, suggesting it was possible to buy gas at prevailing low US prices.

Henry Hub price is the US benchmark price at which gas futures contracts are traded on the New York Mercantile Exchange. JCC, on the other hand, indicates a higher price at which long-term supply deals are usually struck in Asian economies like Japan, Korea and Taiwan. GAILs last December deal with Cheniere gives it access to 3.5 million tonnes of gas from the US for two decades from 2016-17.

According to Kalpana Jain, energy expert and senior director at Deloitte Touche Tohmatsu India, LNG is as transportable as crude oil, meaning gas prices at different geographies can eventually converge.

Increased availability of gas in Asia will certainly have an influence on its prices in the region too, said Jain.

Canada used to supply huge quantities of gas to US through pipelines, but America's shale gas success has forced Toronto to scout for new markets, particularly in Asia. According to official energy statistics from the US government, Canada has traditionally supplied about 90% of US natural gas imports. In 2008, Canada's supplies reached 3.6 trillion cubic feet (tcf) equaling 16% of US' total gas consumption, but this could fall to as low as 3% by 2030.

Indian policy makers feel buying gas from North America would cool down the Asian price and help set a regional benchmark which would be fair to both local gas producers as well as price-sensitive consuming industries like fertilisers, power, cement and petrochemicals. Indian gas producers like ONGC, Oil India and Reliance Industries are subjected to a regulated price of $4.2 per mmBtu.

India is also looking to buy shale gas from the US, once its export terminals are ready. Several gas import and processing facilities in the US built anticipating fuel scarcity are now being converted to export terminals.

India's market for imported gas is expected to grow at least four fold in value in the next few years to $15 billion as energy companies invest in processing terminals for imported gas to meet the energy appetite of sectors like power. Now India imports about 39 million cubic metres a day (mmscmd) of LNG.