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High LNG prices put spotlight on India's exposure to global gas market volatility

Highlights

Large percentage of India's LNG demand uncontracted

Buyers mull switch to long-term contracts, strip tenders

Indian Oil purchased November cargo at $26/MMBtu

Indian LNG importers are turning away from spot purchases due to high LNG prices and are likely to start considering deeper changes in their fuel procurement strategies, as well as their exposure to long-term contracts as the upward pressure on global gas prices persists.

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In the near-term, high gas prices have triggered demand erosion as Indian end-users switch to alternative fuels and some industries reduce capacity on pressured production margins. In the longer term, high prices disincentivize demand growth in new sectors like city gas distribution, and jeopardize India's goal to have 15% of its energy use from natural gas by 2030.

The S&P Global Platts JKM for November was assessed at $37.706/MMBtu Oct. 14 and the Platts West-India Marker (WIM) for November was assessed at $35.800/MMBtu. WIM was trading at around $5.30/MMBtu a year ago.

India currently has LNG regasification capacity of around 42.5 million mt/year, according to the oil and gas ministry, and it plans to reach 70 million mt/year import capacity by 2030 and 100 million mt/year by 2040.

India has 24.3 million mt/year of contracted capacity, so more than half of their regasification capacity, Jeff Moore, Manager, Asian LNG Analytics at Platts said.

This leaves a little more than 40% of the country's LNG imports exposed to spot prices, and while these numbers will vary across key Indian buyers like state-run gas companies GAIL, Petronet LNG and Gujarat State Petroleum Corp, it still means that India has a much larger spot exposure than buyers like Japan or South Korea, where more than 80% of LNG tends to be contracted.

"We have a pragmatic approach to deal with any price hike scenario for the coming winter. We will continue to rely on our long-term suppliers for LNG sourcing than the spot buying route," an official with Petronet said, declining to be named.

Other top importers said they have dialed back from two to three years of spot purchases. An official at the oil and gas ministry said Indian companies do not have much appetite for spot natural gas as prices are at an unprecedented level. "India's buying demand would continue to be biased in favor of long-term contracts, instead of spot deals," the official said.

While Indian buyers may request for more cargoes from term suppliers in the coming months, tight global balances mean that they are unlikely to find LNG cargoes easily.

Another Indian importer said some demand may arise if LNG prices ease to $20/MMBtu, but the affordable level for Indian end-users is mostly around $11-$12/MMBtu. "No one in the Indian market is going to buy LNG at current prices," the importer said.

Procurement activity

Earlier this year, when LNG prices started to rise, several Indian importers sought the protection of strip tenders to reduce exposure to the spot market, although not all of these were awarded.

In August, ArcelorMittal Nippon Steel India issued the largest multi-year LNG import tender by an Indian end-user, seeking 80 LNG cargoes DES from January 2024 to December 2030, Platts data showed.

Torrent Power's 34-cargo tender for Jan 2022-Dec 2026 deliveries closed Aug. 11 and in early September, GSPC sought 18 cargoes for the April 2022-February 2025 period. GAIL's swap tender seeking 12 cargoes for Nov 2021 to Oct 2022 DES India, and selling 12 cargoes FOB Cove Point, which closed Aug. 17 was not awarded, Platts data showed.

In August-September, multiple tenders for spot cargoes were issued but not awarded due to high prices.

RECENT LNG PURCHASE TENDERS

Close Date

Issuer

Slots/Cargoes/Location

Lift/Delivery Period

Results

24-Sept

IOC

1 DES Dahej

06-Nov-21 - 06-Nov-21

Awarded at approx mid $26/MMBtu

15-Sept

GAIL

1 FOB Cove Point

20-Jan-22 - 22-Jan-22

Na

15-Sept

GAIL

2 DES Dabhol

07-Nov-21 - 28-Dec-21

Na

14-Sept

Torrent Power

1 DES Dahej

10-Nov-21 - 28-Dec-21

Not awarded

7-Sept

GAIL

1 FOB Sabine Pass

06-Jul-22 - 15-Jul-22

Not awarded

7-Sept

GAIL

1 DES India

12-Oct-21 - 13-Oct-21

Not awarded

7-Sept

Petronet

1 DES India

16-Sept-21 - 30-Sept-21

Not awarded

3-Sept

GAIL

1 DES Dabhol

07-Nov-21 - 13-Nov-21

Not awarded

3-Sept

GAIL

1 FOB Sabine Pass

06-Sept-21 - 15-Sept-21

Not awarded

5-Oct

GSPC

1 DES Western India

Oct-Nov cargo

Not awarded

Source: S&P Global Platts

One purchase tender by Indian Oil Corp for a November cargo on a DES basis was awarded around mid $26/MMBtu, Platts data showed, which is a relatively high price for an Indian importer.

Market participants said any spot LNG purchases at current prices will be to meet their own urgent demand or downstream contractual obligations, given rising prices for refined products as oil crossed the $80/b mark.

Indian refiners would typically be incentivized to switch to competing fuels such as naphtha and fuel oil at an LNG price of above $20/MMBtu, market participants said, but now the rising oil price also factors into the equation.

Impact on demand

From Oct. 1, India raised the price of domestically produced natural gas by 62% to $2.9/MMBtu until March 31, 2022, reversing a downward trend of over two years, but this may not move the needle for imports.

Indian gas buyers also expect higher supplies from domestic producers like Reliance Industries and ONGC in 2022. In August, natural gas output rose 20.5% year on year to 2.87 Bcm, driven by output from the KG-D6 fields of the Reliance-BP joint venture.

Meanwhile, sectors impacted include industrial users like ceramics, fertilizers, city gas distribution and gas-fired power generation.

"India's power demand in general has improved this summer after its economy picked up from previously imposed COVID-19 lockdowns. On a monthly basis, growth has slowed – average power demand in September rose 2 GW on the year to 163 GW, compared with August when power demand rose 25 GW to 178 GW," Andre Lambine, senior power analyst at Platts Analytics, said.