Up to 40% of India’s LNG imports may eventually be sourced from the spot market, reflecting gas buyers’ preferences for flexibility and choice
Through Covid-19 and the economic slowdown it has caused, India’s LNG imports dropped sharply. They have since rebounded however, affirming the broader trend of increasing gas imports to the country.
In April, which saw India in near total lockdown, overall gas consumption decreased by nearly 26.5%, while LNG imports were down by some 30% compared to the corresponding month in the previous year. In May, consumption was down by 8% and LNG imports increased by 0.5%. In June, consumption decreased by 9.6% and LNG imports were down by 6.9%.
In July, while total gas consumption dipped by 1.7%, LNG imports increased by 6% and in August, consumption was down by 1.9% while LNG imports were up by 5.4%.
K Ravichandran, senior vice president and group head at Moody’s ratings agency ICRA, attributes the rebound to Indian buyers leveraging the decline in global soft spot market prices. He points out that Indian LNG imports in 2019-20 had reached 92 mmscd, representing an increase of 80% over the last four years. He says LNG imports will continue to account for more than 50% of all of India’s gas consumption.
Domestic natural gas production decreased from its highest ever level of 143 mmscd in FY2011 to 87 mmscd in FY2020, largely due to unexpected geological problems, such as water ingress in the Krishna-Godavari basin fields. Mr Ravichandran says the fall in domestic gas production and supplies and the increase in regasification capacity are key enablers behind LNG import growth. A ban on fuel oil and petcoke for industrial use in some northern states and tightening of environment norms on coal gasifiers in the state of Gujarat has also contributed to the trend. Construction of new fertiliser plants and the roll out of city gas distribution networks will help sustain the increase, he adds.
In a country that imports some 85% of its oil and 50% of its gas requirements, many are advocating greater gas use. “Nearly all oil applications can be replaced by gas,” says Hindustan Oil Exploration Company’s managing director P Elango. “High-cost LNG imports will eventually prove more economical and environment friendly for India,” says Mr Elango.
Gas network and LNG terminal development
The present federal government has spoken much about a gas-based economy and has initiated several pipeline projects to put in place the rudiments of a countrywide gas supply network.
India currently has five LNG terminals, four on the west coast, where the gas distribution network is relatively better, and one in Chennai. Six more are either on the drawing boards or at various stages of completion, including the Floating Storage Regasification Unit (FSRU) in Jaigarh, West Bengal. Many of these new terminals are on the east coast. The current nameplate regasification capacity is some 42 mmtpa. By 2025, capacity expansion in existing terminals and starting of operations in the six terminals will more than double the country’s regas capacity.
The LNG surge is supported by price controls on domestic gas that have made investors less enthusiastic about putting money in new gas production projects. For instance, the government’s administered price for natural gas is currently US$1.8 per mmbtu, which has led to calls for a floor price. The price is fixed through a formula in which global crude oil prices play a role.
“Post 2028 is when India will see an even greater push towards the spot LNG market”
A key feature of this LNG growth in India is the growing preference for a spot market. Without a stable policy regime and a long-term commitment, gas buyers prefer the spot market, which gives them flexibility and choice. Industry analysts estimate that at least 30% of the LNG comes in through the spot market and in the next five years this is expected to grow to 40%.
New gas exchange
To facilitate a transparent system of LNG trading, the government, in September, unveiled a policy for gas exchanges with detailed regulations and guidelines. Earlier this year, the Indian Gas Exchange (IGX) started operating as a digital platform. Though volumes are still low and buyers outnumber sellers, formal approval of the IGX by the Petroleum and Natural Gas Regulatory Board is expected to help ramp up trading.
IGX director Rajesh Mediratta says the exchange expects to draw in all concerned stakeholders soon. “The spot market currently accounts for 15% of all gas consumption and we will slowly take some of that space,” he adds.
The advantage of an exchange is that buyers can purchase gas whenever they need. When there is a variation in demand, due not just to supply constraints but also to changing policy environment and a lack of strong market-driven pricing, buyers would rather purchase from the spot market. IGX already covers all the market segments – daily, weekly, fortnightly and monthly – and is rupee denominated. Trading occurs in rupees per mmbtu. Market analysts say that though buyers would prefer a transparent market mechanism such as the exchange – so they get the best price possible – sellers would prefer bilateral agreements. A successful exchange would give a boost to LNG imports, they add.
The IGX is a digital trading platform that allows trading in the spot and forward markets from three LNG hubs: Dahej and Hazira in Gujarat, and Kakinada in Andhra Pradesh. Mr Mediratta says post 2028 is when India will see an even greater push towards the spot market, as this is when many of the legacy long-term contracts that today dominate the LNG scene are set to expire.
Greater use of the spot market will have an impact on shipping, too, says ABS Group manager for LNG services, Robert Kamb. From an operational perspective, trading in the spot market can impose a burden on ship crews, who must conduct additional ‘special operations’ related to cooling down and gassing up prior to loading and managing heel after discharge, he says. “This will vary with the age and specification of the ship and the intervals between spot cargos,” says Mr Kamb. “It is probable that older ships are more likely to be employed in the spot trade, and they may have cargo containment systems and equipment challenges that require extra crew attention and effort. These challenges will vary according to the age, condition, specifications, recent employment, charter terms, and current status of the nominated ship entering the spot trade,” he adds.