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Highlights

Lockdown may trigger 20% drop in downstream natgas demand: official

Cheap oil makes naphtha, furnace oil more economical than gas

Traders expect more LNG cargo delays, deferrals and cancellations

Singapore — India's gas demand is expected to plunge this month, and possibly remain low in coming months, as its economy comes to a standstill due to the 3-week lockdown triggered by the coronavirus outbreak, according to traders, company executives and officials of state-run companies.

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The impact on gas demand will be exacerbated by the recent collapse in oil prices, which have fallen below the $30/b mark and are at near parity — a price level equivalent to natural gas that allows petroleum fuels to displace gas in several industries.

The double whammy from the lockdown and cheap oil is already affecting gas offtake volumes from distribution companies, leading to deferrals of LNG imports and force majeure declarations.

This is significant for the global LNG market because India is the world's fourth-largest LNG importer, with imports of 21.7 million mt in the financial year 2018-19, according to official data, and was on track for growth in LNG demand as new import terminals are built.

India lockdown: India's natural gas demand set to plummet on lockdown, oil prices

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DEMAND CRUNCH

An economic recession will have an outsized impact on India's gas demand compared with countries like Japan or South Korea, where LNG is largely used for power production.

In India, power generation accounted for only 17% of gas demand in January --the remaining demand came from the fertilizer sector, city gas distribution, oil refineries and petrochemicals, official data showed.

The 21-day lockdown imposed this week has already shuttered several factories and manufacturing units that are end-users of natural gas, and the demand destruction is cascading through the supply chain.

"The lockdown will make a big dent in India's gas demand for sure. Our daily gas consumption is about 155 million-160 million cu m/d. I think we could easily see a 15%-20% drop from those levels during the lockdown period," an official with one of India's largest gas importers said.

The official said the city gas distribution sector will be worst hit, with no automobiles on the road the CNG sector will suffer, and gas supply from regasification terminals has also been hit.

Indian gas companies have varying degrees of dependence on LNG.

City gas distributor Gujarat Gas gets around 35% of its supply from contracted LNG and 22% from spot LNG, New Delhi-based Indraprastha Gas gets 13% of its supply from both spot and contracted LNG, and Mumbai-based Mahanagar Gas gets around 14% of its supply from LNG, according to Citigroup data.

India lockdown: India's natural gas demand set to plummet on lockdown, oil prices

BEARISH MARKET IMPACT

The lockdown has sparked bearish sentiment in the wider market, with the Platts JKM spot LNG price falling by over 24 cents/MMBtu on Wednesday on reports of force majeure notices from Indian buyers.

"India was one of the bright spots for LNG demand in February. If Indian demand drops I am not sure what would be supporting LNG prices from a free-fall," a North Asian trader said.

Another official from a Southeast Asian gas supplier confirmed that India's gas demand was dropping, and expected cargo deferment requests from buyers amid the force majeure declarations by Indian ports on Wednesday.

An Indian buyer was heard to have delayed a term cargo for delivery in the second half of May from Australia's Gorgon LNG terminal, according to traders in Singapore.

The oil price collapse will reduce the prices of term LNG cargoes, but the impact has a time lag of around three months due to the pricing basis of three-month average crude prices before delivery.

This means that delaying oil-linked term contracts by a few weeks would make term cargoes a lot cheaper, and also make way for cheaper spot LNG cargoes. This has raised concerns among suppliers that force majeure could be used by buyers for commercial advantage.

"Indeed, it has been speculated that the force majeure declarations would be used as a negotiating tool to seek price reductions for cargoes (which, if linked to oil-indexed prices, could be up to two or three times higher than current spot prices)," Lian Yok Tan, Partner at K&L Gates Straits Law LLC, said in an advisory last month, after Chinese importers sought force majeure protections.

The force majeure problem has been complicated by statements by the Indian government that oil and gas supply falls under the category of essential commodities and do not attract a blanket ban.

OIL SWITCHING

India gas demand is also threatened by crude prices plummeting towards the $20/b mark.

India's oil ministry has been pushing for oil to gas switching to reduce crude import dependency, by replacing naphtha in petrochemical production, furnace oil in industrial heating, and petrol and diesel in transportation.

A low oil price environment will reverse this in many sectors.

"Asian spot LNG prices were supported by some opportunistic buying by Indian buyers. India's monthly LNG imports saw record highs in February. Despite current high equivalent slopes, we expect Asian spot LNG prices to come under substantial weakness," FGE consultant Poorna Rajendran said.