India's domestic gas markets hitch to international LNG pricing as volatility eases

Indian sellers of regasified LNG and domestically produced natural gas are increasingly linking the price of gas sold to LNG cargo prices in Asia -- as the price outlook for LNG prices stabilize after international markets saw a period of unprecedented volatility last year, reflecting the impact of the Russia-Ukraine war.

The LNG price declines have spurred the return of spot procurement activity for cargoes by Indian importers, which have also contributed to an increase in domestic tenders linked to international LNG benchmarks like the Platts JKM and the West India Marker.

Domestic suppliers could be motivated by the fact that spot LNG prices are in historically high ranges, while buyers have been attracted by current LNG prices at about a third of the 2022 annual average price of around $30/MMBtu, market observers said.

In the past, such domestic gas were typically linked only to Brent or Henry Hub.

But so far in 2023, seven public requests for bids for natural gas being sold via auction were seen locally and six of those were linked to the JKM and WIM, both assessed by Platts, part of S&P Global Commodity Insights.

"The pricing currently means that LNG is softer, so it makes sense to link prices to LNG," an Indian source at a fertilizer company said.

"People will move increasingly towards the hybrid pricing by using Brent and JKM or Brent and WIM because it is advantageous as the outlook for prices is favorable."

LNG prices have been trading near two-year lows below $10.0/MMBtu, with the JKM for July assessed at $9.785/MMBtu on May 23 and the WIM price assessed at $9.425/MMBtu.

The forwards curve suggests that weaker LNG prices could persist through to 2026, with the September JKM price derivate being assessed at $10.95/MMBtu and October at $12.075/MMBtu on May 22, S&P Global data showed. The prices for JKM derivatives of 2025 and 2026 were assessed at $13.275/MMBtu and $10.7/MMBtu, respectively.

Gas reliance, pricing economics

India produced 33.664 billion standard cu m of natural gas in the 2022-23 financial year, up from 33.131 billion standard cu m in FY 2021-22. India's financial year runs from April to March.

In FY 2022-23, India imported 26.647 billion standard cu m equivalent of LNG, implying that India meets nearly 44.18% of its natural gas consumption through LNG, according to data from the Petroleum Planning and Analysis Cell. India imported 20.79 million mt of LNG in 2022, according to S&P Global data.

Meanwhile, the Administered Pricing Mechanism is set to have a limited impact on linking auctions to LNG-based market prices.

India's cabinet recently approved revised natural gas pricing guidelines for domestically produced natural gas in line with the recommendations of the Kirit Parikh panel report.

Under the revised guidelines, the price of natural gas under the country's APM will be 10% of the monthly average of the Indian Crude Basket and it will be announced through a notification every month instead of being revised every six months.

Market participants said that even though the APM may be linked to crude oil, the cap on the APM price is expected to be removed in 2026. Traders said that once the cap is removed, pricing could be done through an auction or tender-based mechanism.

About 70% of the gas produced in India falls under the APM regime, under which gas is subsidized and allocated to various sectors depending on their priority when it comes to national interest.

Around 28% of the total gas produced under APM goes to the power and CGD sectors, around 17% to the fertilizer sector, and the rest is distributed among refineries, petrochemical and other sectors.

Sources said that while some market participants preferred crude oil-linked pricing because of the ease of hedging due to higher liquidity, the hedging ability using JKM had also improved due to rising liquidity and declining financial costs for using LNG derivatives.

A source from a gas-based power company said market participants tend to look at the most competitive price to link the auction as it would then draw demand.

The dynamic pricing also provides a cushion in case crude oil prices jump in a short space of time, the source added.

Market participants said that sellers have used dynamic pricing to set a ceiling or floor prices as well in a combination of crude oil and LNG prices.

In total, 13.12 million standard cu m/d was auctioned, of which only 30,000 standard cu m/d was not linked to LNG-based pricing.

The largest of these gas sale auctions have been conducted by the Reliance and British Petroleum consortium from its KG-D6 gas fields in east India.

The consortium auctioned 6 million standard cu m/d of gas linked to JKM, with a constant premium in April, for a tenure of five years. The consortium has again auctioned 5 million standard cu m linked to the JKM price for a tenure of three years.

Vedanta Limited auctioned 1 million standard cu m/d of gas from its gas field in northwest India linked to West India Marker. Other auctions were conducted by Essar and Hindustan Oil Exploration Company that are linked to JKM and WIM prices, respectively.