Commodities 2021: India's growing love for spot LNG may shift import strategy

Singapore — India's growing interest to buy LNG cargoes based on spot prices may start to alter its import landscape in 2021, prompting producers to rethink their supply strategy, while gas demand could see double-digit growth as industrial and residential consumption revive.

A part of that growth will hinge on the outcome of the gas policy reforms New Delhi is pursuing -- the removal of price ceilings on domestic gas output, introducing a unified pipeline tariff structure, and bringing the fuel under a nationwide goods and services tax.

In addition, the market will be watching how pricing of cargoes evolves. State-owned Petronet's maiden LNG spot deal based on an Indian LNG spot price -- the Platts West India Marker, or WIM -- in September has taken the country closer to signing its first term deal based on spot markers, reflecting growing interest to move away from oil-linked deals and adopt market-based pricing.

"India took significant advantage of the low spot price environment in 2020 as imports hit an all-time high in February as COVID-19 related demand destruction started impacting Northeast Asia. Platts Analytics doesn't expect JKM prices to fall as low as it did in 2020 during the summer of 2021," said Jeffrey Moore, manager for Asian LNG Analytics at S&P Global Platts Analytics.

"However, spot prices should once again be relatively competitive versus legacy contract prices linked to oil, and India is expected to continue to take advantage of this dynamic," he added.

WIM plummeted to a record low of $1.763/MMBtu on April 23 on the back of global demand destruction due to the coronavirus-related lockdowns. Prices have recovered since then, with WIM Derivatives for Q1 2021 at $6.464/MMBtu on Dec. 7 on the Intercontinental Exchange.

"Demand in India is a function of price. With the higher prices for Q1 next year we are not going to see imports as strong as this year. LNG demand from power plants, which increased this year, may drop down since prices are above $6/MMBtu now," a major Indian LNG aggregator said.

Promising demand outlook

Platts Analytics expects overall gas demand to grow to 66 Bcm in 2021, up more than 10% from 2020 levels.

In addition, domestic production is expected to make a turnaround in 2021 by growing 4 Bcm year on year after falling 3 Bcm in 2020. LNG imports are expected to keep increasing in 2021 and reach 40 Bcm, up nearly 3 Bcm year on year, Platts Analytics added.

India's gas demand is going to continue growing strongly in 2021 on expectations that LNG spot prices would again soften next summer. New city gas connections and normalization of mobility restrictions will boost compressed natural gas demand, said James Waddell, senior global gas analyst at Energy Aspects.

"We are also expecting considerable growth to come from the fertilizer sector with the installation of new plants over 2021 running on methane. Refiners are also upping their use of LNG substantially," Waddell said.

Poorna Rajendran, a consultant at FACTS Global Energy, said India's LNG demand would witness a year-on-year growth on the back of infrastructure developments and an anticipated weakness in spot prices.

"Through 2021, we also expect GAIL to make progress with pipeline connectivity from Kochi to Bengaluru in the south and their Jagdishpur-Haldia Bokara-Dhamra pipeline in the east," Rajendran added. "And with the expected start-up of H-Energy's Jaigarh terminal in March 2021 and pipeline developments in the south, India's import capabilities will get a significant boost in 2021."

This resilient demand is happening while upstream production growth is facing hurdles, owing to relatively low ceiling prices set by the country's Petroleum Planning and Analysis Cell, or PPAC. "This outlook for a slower ramp-up in domestic production is reducing a threat to India's LNG demand growth over 2021-23," he added.

PPAC set the domestic gas price produced from conventional gas fields from October 2020 to March 2021 at $1.79/MMBtu, well below the breakeven costs of gas producers in the country.

Awaiting crucial reforms

The Petroleum and Natural Gas Regulatory Board is also close to authorizing a major revamp to the country's unified gas pipeline tariff policy, which would reduce the barriers for LNG deliveries from the west to gas stranded regions in the east.

The new tariff structure would help buyers further away from the gas source as they would be paying lesser tariffs. The buyers further away from the gas source would be cross subsidized by end-users closer to the gas sources since the tariff paid by them would increase.

The gas market will also keep an eye on how the push toward clean fuels is going to affect demand from various energy commodities.

This has even prompted the country's biggest LNG importer Petronet to embark on a major diversification drive toward new businesses, such as LNG bunkering, compressed biogas and renewables, while not diluting focus on its core LNG portfolio.